Chapter 4 (Ratio Analysis)

Financial
Statement
Ratio Analysis
It measure the results
of business
operations or overall
performance and
1. Profitability Ratios effectiveness of the
firm.
Total Sales= 260,000
Sales Return= 10,000
Gross Profit Ratio
Formula :
Gross Profit x 100
Cost of Goods Sold= 200,000
Net Sales
Computation:
Gross Profit= (260,000-10,000)-
200,000=50,000
Gross Profit Ratio= 50,000 x 100= 20%

250,000
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NET PROFIT RATIO:
Net Profit x 100
Net Sales
Net Sales= (260,000-10,000)= 250,000
Net Profit Ratio= (( 20,000/250,000) X 100)= 8%
OPERATING RATIO:
(( Cost of Goods Sold+ Operating Expense)x100
Net Sales
(( 90,000+15,000x 100 ( 115,000 x 100) = 70%

150,000 150,000 12/06/2020
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((COST OF GOODS SOLD+OPERATING O
EXPENSE)) X 100
P R
NET SALES
E A
Operating Ratio Formula: R
(( 90,000+15,000)) x 100 A T
150,000 T I
I
(( 115,000)) x 100
N O
150,000
G
70%
Return on Shareholders
Investment or Net Worth
FORMULA
Return on Share Holder’s= (Net Profit (After Interest and Tax)) x100
Investment Shareholder’s Fund
Suppose Net Income in an organization is P30,000 where as

Shareholder’s Investments or Funds are P200,000
Return on Shareholders Investment = (30,000) x 100= 15%

200,000
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Return on Equity
Capital
FORMULA:
Return on Equity Capital= (Net Profit After Tax- Preference Dividend) x 100
Equity Share Capital
Example:
Equity Share Capital (P50)10,000; 9% Preference Share Capital P250,000;

Taxation Rate: 35% of Net Profit, Net Profit before Tax P200,000
Return on Equity Capital (ROEC) Ratio= ((200,000-70,000-22,500)X 100)= 21%

500,000
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Dividend Yield Ratio
FORMULA:
Dividend Yield Ratio= Dividend Per Share

Market Value per Share
Example:
If a company declares dividend at 10 on its shares, each having a paid up value of
P4.00 and market value of P12.50
Calculation:
Dividend per Share= (10/Shares)/100x4= P0.40

Dividend Yield Ratio= ( P0.40/12.50)X100= 3%
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Dividend Payout Ratio
Formula: Dividend Payout Ratio= Dividend per Equity Share
Earnings per Share
A complementary of this Ratio is Retained Earnings Ratio.

Retained Earning Ratio= Retained Earning per Share
Earnings per Share
Example:
Net Profit 5,000 No. of Equity Shares 1,500
Provision for 2,500 Dividend per Equity Share P0.25
Taxation
Preference 1,000
Dividend
Calculation:
Payout Ratio = (P0.25/P1) x 100 = 25%
9
Retained Earning Ratio= (P0.75/P1) x 100= 75% 12/06/2020
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Earnings per Share (EPS) Ratio
Formula:
Earnings per Share Ratio= Net Profit after Tax- Preference Dividend
No. of Equity Shares ( Common Shares)
Example:
Equity Share Capital (P100): P1,000,000; 9% Preference Share Capital: P500,000;
Taxation Rate: 35% of Net Profit; Net Profit Before Tax: P400,000
Calculation:
EPS= (P400,000-100,000-45,000) = P255,000 = P25.50
(P 1,000,000_) 10,000
P100
10
Price Earning Ratio
Formula:
Price Earnings Ratio= Market Price per Equity Share
Earnings per Share
Example:
The market price of a share is P15 and earning per share is P3
Calculation
Price Earnings Ratio= P15 =P5
P3
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Liquidity Ratio
Liquidity Ratios measure the short term solvency of financial position of a
firm. These ratios are calculated to comment upon the short term paying
capacity of a concern or the firm’s ability to meet its current obligations.
Current Ratio
Formula:
Current Ratio= Current Assets

Current Liabilities
Example:
Current Assets are P600,000 and total current liabilities are P300,000
Current Ratio= P 600,000/ P300,000
12
Current Ratio= 2:1 12/06/2020
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Liquid/Acid Test/Quick Ratio
Formula:
Liquid Ratio= Liquid Assets
Current Liabilities
Example:
Cash P90; Accounts Receivable P730; Inventory P900; Marketable Securities P800
Accounts Payable P350; Notes Payable P500; Accrued Expenses P75; Tax Payable P550
Calculations:
Liquid Assets= P90+P730+P800= P1,620
Current Liabilities= P350+P500+P75+P550= P1,475
Liquid Ratio= P1,620/P1,475= 1.10:1 12/06/2020

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Activity Ratio
Activity Ratios are calculated to measure the efficiency with which the resources
of a firm have been employed. These ratios are also called turnover ratios
because it indicates the speed with which assets are being turned over into sales.
Example:
Inventory Turnover Ratio The cost of goods sol is P300,000. The beginning inventory is P50,000
Formula of Inventory Turnover Ratio: and the ending inventory is P90,000
Cost of Goods Sold Calculation:

Average Inventory Inventory Turnover Ratio ( ITR)= P300,000
((50,000+90,000))
2
= 4.29 12/06/2020
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Debtors/Receivables Turnover Ratio
Formula:
NET CREDIT SALES
AVERAGE TRADE RECEIVABLES CALCULATION:
Example: Receivable Turnover= (P250,000-10,000)

((P35,000+P55,000))
2
Credit Sales P250,000; Sales Returns
P10,000; Trade Receivables, = P240,000
beginning P35,000 and Trade 45,000
Receivables, ending, P55,000
= 5.33 Times
Average Collection Period
Formula:
360 days
Receivable Turnover CALCULATION:
Example: Average Collection Period= 360 Days

5.33 Times
Using the example in receivable
turnover which gives a result of 5.33 = 67.5 or 68 Days
Times
Creditors/Payable Turnover Ratio
It gives the average credit period enjoyed from the creditors.
AVERAGE PAYMENT PERIOD
Formula:
360 DAYS CALCULATION:
PAYABLE TURNOVER RATIO
Payable Turnover Ratio = (450,000-35,000)
Example: 65,000+85,000
2
Purchases P450,000, Purchase
Returns P35,000, Accounts Payable
Beginning P65,000 and Accounts = P415,000/P75,000
Payable ending P85,000 = 5.53 Times
Ave.Paymnt.Period= 360 Days/5.53 Times

= 65 DAYS
Working Capital Turnover Ratio
COST OF SALES
NET WORKING CAPITAL
Working Capital
Example
Turnover Ratio
Cash 5,000
Notes Rec. 15,000
Inventory 10,000
Accounts Rec. 27,000
Current Liabilities 45,000
Cost of Sales 125,000
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Fixed Assets Turnover Ratio
COST OF SALES
NET FIXED ASSETS
Example CALCULATION
Working Capital
Land P1.2M Turnover Ratio
Building(net) 550K
Equipment 350k
Cost of Sales 365k
12/06/2020
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THANK YOU
PEEPZZ 12/06/2020
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Chapter 4 (Ratio Analysis)

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Financial

Gross Profit Ratio= 50,000 x 100= 20%

(( 90,000+15,000x 100 ( 115,000 x 100) = 70%

Suppose Net Income in an organization is P30,000 where as

Return on Shareholders Investment = (30,000) x 100= 15%

Equity Share Capital (P50)10,000; 9% Preference Share Capital P250,000;

Return on Equity Capital (ROEC) Ratio= ((200,000-70,000-22,500)X 100)= 21%

Dividend Yield Ratio= Dividend Per Share

Dividend per Share= (10/Shares)/100x4= P0.40

A complementary of this Ratio is Retained Earnings Ratio.

Current Ratio= Current Assets

Liquid Ratio= P1,620/P1,475= 1.10:1 12/06/2020

Cost of Goods Sold Calculation:

Example: Receivable Turnover= (P250,000-10,000)

Example: Average Collection Period= 360 Days

Ave.Paymnt.Period= 360 Days/5.53 Times

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