Ratio Analysis Formula (Table of Contents)
What is the Ratio Analysis Formula?
The term “Ratio Analysis” refers to the analytical technique wherein a plethora of financial ratios is computed based on the financial information either available in the annual reports or public domain. The ratio analysis helps in assessing the subject company’s financial and operational position.
The financial ratios used in ratio analysis technique are broadly categorized into the following four major categories:
- Liquidity Ratios
- Solvency Ratios
- Efficiency Ratios
- Profitability Ratios
Explanation
The formula for Ratio Analysis can be calculated by using the following steps:
1. Liquidity Ratios
These ratios indicate the company’s cash level, liquidity position and the capacity to meet its short-term liabilities. The formula of some of the major liquidity ratios are:
- Current Ratio = Current Assets / Current Liabilities
- Quick Ratio = (Cash & Cash Equivalents + Accounts Receivables) / Current Liabilities
- Cash Ratio = Cash & Cash Equivalents / Current Liabilities
2. Solvency Ratios
These ratios indicate whether the company has the capability to meet its long-term obligations by comparing its debt level with its assets and equity etc. The formula of some of the major solvency ratios are:
- Debt-To-Equity Ratio = Total Debt / Total Equity
- Debt Ratio = Total Debt / Total Assets
- Interest Coverage Ratio = EBITDA / Interest Expense
3. Efficiency Ratios
These ratios indicate how efficiently a company is able to utilize its available assets or convert its inventories to cash. The formula of some of the major efficiency ratios are:
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- Receivables Turnover Ratio = Sales / Accounts Receivable
- Inventory Turnover Ratio = COGS / Inventories
- Payable Turnover Ratio = COGS / Accounts Payable
- Asset Turnover Ratio = Sales / Total Assets
- Net Fixed Asset Turnover Ratio = Sales / Net Fixed Assets
- Equity Turnover Ratio = Sales / Total Equity
4. Profitability Ratios
These ratios demonstrate a company’s efficiency to use its assets to generate profits. The formula of some of the major profitability ratios are:
- Gross Margin = (Sales – COGS) / Sales
- Operating Profit Margin = EBIT / Sales
- Net Margin = Net Income / Sales
- Return on Total Asset (ROA) = EBIT / Total Assets
- Return on Total Equity (ROE) = Net Income / Total Equity
Example of Ratio Analysis Formula (With Excel Template)
Let’s take an example to understand the calculation of Ratio Analysis in a better manner.
Ratio Analysis Formula – Example #1
Let us take the example of Apple Inc.’s annual report for 2019 to illustrate the calculation of different ratios used in ratio analysis. As per the latest annual report, the following information is available. Based on the given information, calculate the liquidity, solvency, efficiency and profitability ratios of Apple Inc. for the year 2019.
Solution:
Liquidity Ratios
Current Ratio is calculated using the formula given below
Current Ratio = Current Assets / Current Liabilities
- Current Ratio = $162,819 million / $105,718 million
- Current Ratio = 1.54x
Quick Ratio is calculated using the formula given below
Quick Ratio = (Cash & Cash Equivalents + Accounts Receivables) / Current Liabilities
- Quick Ratio = ($48,844 million + $22,926 million) / $105,718 million
- Quick Ratio = 0.68x
Cash Ratio is calculated using the formula given below
Cash Ratio = Cash & Cash Equivalents / Current Liabilities
- Cash Ratio= $48,844 million / $105,718 million
- Cash Ratio = 0.46x
Solvency Ratios
Debt to Equity Ratio is calculated using the formula given below
Debt to Equity Ratio = Total Debt / Total Equity
- Debt to Equity Ratio = $108,047 million / $90,488 million
- Debt to Equity Ratio = 1.19x
Debt Ratio is calculated using the formula given below
Debt Ratio = Total Debt / Total Assets
- Debt Ratio = $108,047 million / $338,516 million
- Debt Ratio = 0.32x
Interest Coverage Ratio is calculated using the formula given below
Interest Coverage Ratio = EBITDA / Interest Expense
- Interest Coverage Ratio = $76,477 million / $3,576 million
- Interest Coverage Ratio = 21.39x
Efficiency Ratios
Receivables Turnover Ratio is calculated using the formula given below
Receivables Turnover Ratio = Sales / Accounts Receivable
- Receivables Turnover Ratio = $260,174 million / $22,926 million
- Receivables Turnover Ratio = 11.35x
Inventory Turnover Ratio is calculated using the formula given below
Inventory Turnover Ratio = COGS / Inventories
- Inventory Turnover Ratio = $161,782 million / $4,106 million
- Inventory Turnover Ratio = 39.40x
Payable Turnover Ratio is calculated using the formula given below
Payable Turnover Ratio = COGS / Accounts Payable
- Payable Turnover Ratio = $161,782 million / $46,236 million
- Payable Turnover Ratio = 3.50x
Asset Turnover Ratio is calculated using the formula given below
Asset Turnover Ratio = Sales / Total Assets
- Asset Turnover Ratio = $260,174 million / $338,516 million
- Asset Turnover Ratio = 0.77x
Net Fixed Asset Turnover Ratio is calculated using the formula given below
Net Fixed Asset Turnover Ratio = Sales / Net Fixed Assets
- Net Fixed Asset Turnover Ratio = $260,174 million / $37,378 million
- Net Fixed Asset Turnover Ratio = 6.96x
Equity Turnover Ratio is calculated using the formula given below
Equity Turnover Ratio = Sales / Total Equity
- Equity Turnover Ratio = $260,174 million / $90,488 million
- Equity Turnover Ratio = 2.88x
Profitability Ratios
Gross Margin is calculated using the formula given below
Gross Margin = (Sales – COGS) / Sales
- Gross Margin = ($260,174 million – $161,782 million) / $260,174 million
- Gross Margin = 37.8%
Operating Profit Margin is calculated using the formula given below
Operating Profit Margin = EBIT / Sales
- Operating Profit Margin = $63,930 million / $260,174 million
- Operating Profit Margin = 24.6%
Net Margin is calculated using the formula given below
Net Margin = Net income / Sales
- Net Margin = $55,256 million / $260,174 million
- Net Margin = 21.2%
Return on Total Asset (ROA) is calculated using the formula given below
Return on Total Asset (ROA) = EBIT / Total Assets
- Return on Total Asset (ROA) = $63,930 million / $338,516 million
- Return on Total Asset (ROA) = 18.9%
Return on Total Equity (ROE) is calculated using the formula given below
Return on Total Equity (ROE) = Net Income / Total Equity
- Return on Total Equity (ROE) = $55,256 million / $90,488 million
- Return on Total Equity (ROE) = 61.1%
Source Link: Apple Inc. Balance Sheet
Relevance and Use of Reserve Ratio Formula
One of the major uses of ratio analysis is that it makes it easier and simpler to compare companies with different scale of operations. Further, it also simplifies the analysis of the financial statements and helps in identifying deviation in historical trends.
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