Ratio Analysis

Analyst and other stakeholders of company are interested with qualitative information from financial statements by examining relationsip between items on the statements and identifying trends in these relationships.

There are major types of ratios in analysis:

1. Liquidity ratios: Measures of the company’s short term ability to pay its maturing obligations. Consists of : Current ratio, quick or acid-test ratio, current cash coverage ratio.

2. Activity ratios: Measures of how effectively the company uses its assets. Consists of : receiveables turnover, inventory turnover, asset turnover.

3. Profitability ratios: Measures of the degree of success/failures of a given company or division for a given period of time. Consists of : profit margin on sales, rate of return on assets, rate of return on common stock equity, earning per share, price-earnings ratio, payout ratio.

4. Coverage ratios: Measures of degree of protection for long-term creditors and investors. Consists of : debt to total assets, times interest earned, cast debt coverage ratio, book value per share, free cash flow.

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