Ratio analysis is basically used to understanding the financial health of a business entity. With the help of ratios we can easily calculate from current year performance of the companies and are then compared to previous years. Ratio analysis conducts a quantitative analysis of information in a company’s financial statements. These Ratios are most commonly used in banking sector can be divided into five main categories Liquidity Ratios
A) Liquidity Ratios
Liquidity Ratios are used to determine a company's ability to meet its short terms obligations. These include;
1) Current Ratio
2) Acid Test Ratio
3) Working capital
What Does Current Ratio Mean?
A liquidity ratio that measures a company's ability to pay short-term obligations. Also known as "liquidity ratio", "cash asset ratio" and "cash ratio". OR
It is a measure of general liquidity and is most widely used to make the analysis for short term financial position or liquidity of a firm. It is calculated by dividing the total of the current assets by total of the current liabilities. Formula = Current Assets / Current Liabilities
This ratio answer in “Times”
Acid Test Ratio
What Does Acid-Test Ratio Mean?
A stringent indicator that determines whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. Also known as the "Acid-test ratio" or the "Quick assets ratio" or “Liquidity ratio”. OR
An indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company. Formula = Current Assets – Inventories – Prepaid Expense / Current Liabilities OR
Acid Test Ratio = Quick Assets / Current Liabilities
Quick Assets = Current assets - (Stock + Prepaid Expenses)
This ratio answer in “Times”
What Does Working Capital Mean?
A measure of both a company's efficiency and its short-term financial health. Also called “net current assets” or “current capital”. OR
The cash available for day-to-day operations of an organization. Net liquid assets computed by deducting current liabilities from current assets. The amount of available working capital is a measure of a firm's ability to meet its short-term obligations. Formula = Current Assets – Current Liabilities
This ratio answer in “Rs”
(Composed & Solved Hafiz M Usman www.vuzs.net)
B) Leverage Ratios
Leverage ratios measure the degree of protection of suppliers of long term funds. These include:
1) Times Interest Earned
2) Debt Ratio
3) Debt / Equity Ratio
4) Debt to Tangible Net worth Ratio
5) Total Capitalization Ratio
Times Interest Earned
What Does Times Interest Earned - TIE Mean?
A metric used to measure a company's ability to meet its debt obligations. It is calculated by taking a company's earnings before interest and taxes (EBIT) and dividing it by the total interest payable on bonds and other contractual debt. OR
The times interest earned ratio indicates the extent of which earnings are available to meet interest payments. The times interest earned ratio is an indicator of a company’s ability to meet the interest payments on its debt. Formula = Earning Before Income Tax (EBIT) + Interest Expense / Interest Expense This ratio answer in “Times”
What Does Debt Ratio Mean?
A ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load. OR
Debt ratio indicates the percentage of a company's assets that are provided via debt or liability. Formula = Total Liabilities / Total Assets This ratio answer in “%” (Composed & Solved Hafiz M Usman www.vuzs.net)
What Does Debt/Equity Ratio Mean?