 # Financial Statement Ratio Analysis

### Financial Statement Ratio Analysis

To fit the need of the analyst different ratios are calculated from the financial statements. They are not limited to some sorts which were once calculated just for the purpose of company management. Now, in the modern age of technology, it is a complete matter that everyone has free flow of information. Being informed is the best thing that can happen for any party. And it is not just about being informed, it is also about doing the crisp math and making decision. Investors, creditors, owners and managers all need to get to their decisions alike. As we all know financial statements are comprised of four different parts. They are:

1. Income statement,
2. Cash-flow statement,
3. Owner’s equity statement,
4. Balance sheet.

So, the information available makes the ratios. Some of the ratios are even cross statement based. These ratios are also based on individual statements.

Based on the financial statements the ratios are described over here, for the distinguished ratios and formulas get a view of Classification Of Ratio Analysis. financial statement ratio analysis

Income statement based ratios:

As for financial statement ratio analysis, these ratios show a measure of those sorts which give us overview of entity’s overall profitability. “Net sales” is an important factor over here. Because, that is the only route of revenue for a manufacturing entity, tries to make up for the expenditures through that. Based on other parameters ratios show any related party the true worth of the entity or, the profitability of investing there.

The ratios in this section are:

a)      Gross Profit Ratio(Gross Income Ratio),

b)      Net Profit Ratio(Net Income Ratio),

c)      Expense Ratio,

d)      Operating Ratio.

Balance Sheet Ratios:

The asset and liability is the portion that attracts all the concerned parties the most. People tend to look at different aspects over here and derive to decisions that might help them in their plan on investment in that stock or, taking the investment away.

Different kinds of ratios are calculated from one balance sheet:

Liquidity ratio:

This shows the parties what the entity’s real strength is in paying out short term debt and financing its day to day operations. Having a current asset base much higher than the current liability base initially suggests idle funds and the complete opposite suggests ill-controlled operations.

The ratios are:

–          Current ratio,

–          Quick ratio,

–          Absolute liquid ratio,

–          Current cash debt coverage ratio.

Solvency ratio:

These ratios are those which give a look into the company’s solvency in financing newer projects or, even bailing out of any losing projects it has investment in.

These ratios are:

–          Debt-Equity Ratio,

–          Times interest earned Ratio,

–          Proprietary Ratio,

–          Fixed Assets to Equity ratio,

–          Current Assets to Equity Ratio,

–          Capital Gearing Ratio.

Cross Financial Statement Based Ratio:

When information from different financial statements are used for calculating one individual ratio, the ratio is called a cross financial statement based ratio or, composite ratio. Based on different financial statement usage and their category the ratios are:

Activity Ratio (Income statement and Balance Sheet):

• Inventory turnover ratios,
• Receivables turnover ratio,
• Average collection period,
• Accounts payable turnover ratio,
• Average payment period,
• Assets turnover ratio,
• Working capital turnover ratio,
• Fixed assets turnover ratio.

Profitability Ratio (Owner’s Equity Statement and income statement):

o   Price earnings ratio,

o   Dividend yield ratio,

o   Dividend payout ratio,

o   Return on capital employed ratio,

o   Earnings per share ratio,

o   Return on shareholder’s investment/Return on equity,

o   Return on common stockholders’ equity ratio.

Whatever the ratio is and which financial statement it may get based on it is the most important point to remember that each and every ratio needs to be time relevant. That means they need to be simultaneous to the same financial year as the other cogent of that ratio is. Otherwise the resultant ratio will bear no fruit. So, without all the financial statements of a particular financial year it is hard to derive a compact result or, a perfect decision.