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How To Learn Ratio Analysis Formulas In 15 Minutes

What is Ratio Analysis?
So basically, Ratio Analysis is a process to gain a deeper insight into the financial health and the current & probable performance of the company by comparing and analyzing the information provided in the financial statements.

To compare and analyze the information recorded in the financial statements, certain formulas are used. Let’s have a look at them.





Ratio Analysis Formulas

Liquidity Ratio
Liquidity ratio focuses on the company’s current assets and liabilities to analyze if it can pay the short term debts.

Current Ratio - Current Assets/Current Liabilities

Quick Ration -  Liquid Assets/Current Liabilities

Absolute Liquid Ratio -  Absolute Liquid Assets/Current Liabilities

Profitability Ratio
This ratio analyzes how a company uses its assets and how effectively it generates the profit from the equities and assets.

Ratios
Formulas
Gross Profit Ratio
Gross Profit / Net Sales X 100
Operating Profit Ratio
Operating Profit / Net Sales X 100
Net Profit Ratio
Operating Profit / Net Sales X 100

Working Capital Ratio
This ratio analyzes if the company can pay off the current debts or liabilities using the current assets.

Ratios
Formulas
Inventory Ratio
Net Sales / Inventory
Debtors Turnover Ratio
Total Sales / Account Receivables
Debt Collection Ratio
Receivables X Months or days in a year / Net Credit Sales for the year

Capital Structure Ratio
The capital structure ratio analyzes how structurally a firm uses the capital or funds to finance its operations.

Ratios
Formulas
Debt Equity Ratio
Total Long Term Debts / Shareholders Fund
Proprietary Ratio
Shareholders Fund/ Total Assets
Capital Gearing Ratio
Equity Share Capital / Fixed Interest Bearing Funds

Overall Profitability Ratio
This ratio measures how profitable a particular firm or company is, or how it can turn its assets and capital into profits for future use.

Ratio
Formula
Overall Profit Ability Ratio
Net Profit / Total Assets



Tips to Learn Ratio Analysis Formulas Easily

1. Understand
  • Understand the ratios rather than just memorizing them.
  • Write down ratios & work them out several times using different numbers.


2. Categorize
  • Categorize financial ratios according to the type of information they provide.
  • Place financial ratios in six categories.

3. Prioritize
  • Prioritize the key financial ratios.
  • Pick out the five most important ratios and learn them first.


4. Create Visual Representation
  • Try to create visual representation of each element of the ratio in your head.
  • Connect each symbol by creating a story to keep them all together.



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