- Profitability Ratios:
- Gross Profit Margin: Measures the percentage of revenue retained after deducting the cost of goods sold. Formula: Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue
- Net Profit Margin: Evaluates the company’s profitability by indicating the percentage of net income generated from total revenue. Formula: Net Profit Margin = Net Income / Revenue
- Return on Assets (ROA): Indicates the efficiency of a company in generating profits from its assets. Formula: ROA = Net Income / Total Assets
- Return on Equity (ROE): Measures the return generated on shareholders’ equity. Formula: ROE = Net Income / Shareholders’ Equity
- Activity Ratios:
- Inventory Turnover Ratio: Measures how many times inventory is sold and replaced during a period. Formula: Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
- Accounts Receivable Turnover Ratio: Indicates how efficiently a company collects its accounts receivable. Formula: Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable
- Total Asset Turnover Ratio: Measures the efficiency of a company in generating revenue from its assets. Formula: Total Asset Turnover Ratio = Revenue / Average Total Assets
- Liquidity Ratios:
- Current Ratio: Assesses a company’s ability to cover its short-term liabilities with its short-term assets. Formula: Current Ratio = Current Assets / Current Liabilities
- Quick Ratio (Acid-Test Ratio): Measures a company’s ability to meet its short-term obligations using its most liquid assets. Formula: Quick Ratio = (Current Assets – Inventory) / Current Liabilities
- Cash Ratio: Indicates the company’s ability to cover its short-term liabilities with its cash and cash equivalents. Formula: Cash Ratio = Cash and Cash Equivalents / Current Liabilities
- Market Capitalization Ratios:
- Price-to-Earnings (P/E) Ratio: Measures the valuation of a company’s stock relative to its earnings per share. Formula: P/E Ratio = Market Price per Share / Earnings per Share (EPS)
- Price-to-Book (P/B) Ratio: Compares a company’s market value to its book value. Formula: P/B Ratio = Market Price per Share / Book Value per Share
- Dividend Yield: Indicates the return on investment from dividends relative to the market price of the stock. Formula: Dividend Yield = Dividends per Share / Market Price per Share
These ratios provide valuable insights into various aspects of a company’s financial performance, efficiency, liquidity, and market valuation. Analyzing these ratios helps investors, creditors, and analysts in making informed decisions regarding investment, lending, and strategic planning.