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Module 7 - Ratio Analysis

The document outlines key financial ratios used in ratio analysis to assess a company's financial health, including the Current Ratio, Debt-to-Equity Ratio, Gross Margin Ratio, and Profit Margin Ratio. Each ratio is explained with its formula and interpretations for values above, below, or equal to 1, indicating the company's liquidity, reliance on debt, profitability, and efficiency in generating profit. This analysis helps in understanding a company's ability to meet obligations and manage costs.

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MICHELLE MILANA
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34 views7 pages

Module 7 - Ratio Analysis

The document outlines key financial ratios used in ratio analysis to assess a company's financial health, including the Current Ratio, Debt-to-Equity Ratio, Gross Margin Ratio, and Profit Margin Ratio. Each ratio is explained with its formula and interpretations for values above, below, or equal to 1, indicating the company's liquidity, reliance on debt, profitability, and efficiency in generating profit. This analysis helps in understanding a company's ability to meet obligations and manage costs.

Uploaded by

MICHELLE MILANA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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RATIO ANALYSIS

WEEK 7 MODULE 7
Ratio Analysis: This involves calculating ratios using
numbers from financial statements.

It's like using simple math to understand how healthy a


company is, financially.
1. Current Ratio: Is one of the liquidity ratios that measures a firm’s ability to pay off its
current or short-term liabilities with its current assets.

Formula: Current Ratio = Current Assets / Current Liabilities

• Above 1: A ratio above 1 means that a company's current assets exceed its current liabilities,
indicating it can be able to meet its short-term obligations comfortably.

• Below 1: A ratio below 1 means that a company's current liabilities exceed its current assets,
suggesting potential liquidity issues. It might struggle to pay off its short-term debts with its existing
short-term assets.

• Equal to 1: The company has just enough assets to cover its short-term liabilities, but no extra
cushion. It means that total current assets are exactly equal to total current liabilities.
2. Debt-to-Equity Ratio: Measures how much a company relies on debt compared to equity
(owner’s investment) to finance its operations.

Formula: Debt to Equity Ratio = Total Liabilities / Total Equity

Interpretations:

• Above 1: The company has more debt than equity, meaning it relies more on borrowing.
• Below 1: The company has more equity than debt, meaning it relies more on personal money
invested in the business.
• Equal to 1: The company has an equal balance of debt and equity.
3. Gross Margin Ratio. Measures how much profit a company makes from selling
its products before deducting other expenses.

Formula: Gross Margin Ratio = Gross Margin / Net Sales x 100

Interpretation:
• Higher Ratio: The company earns more profit from sales before other expenses.
Good profitability.
• Lower Ratio: The company has higher costs compared to sales. May indicate
cost issues.
4. Profit Margin Ratio. Shows how much of a company's sales turn into profit after
all expenses are deducted. It measures how efficiently a business generates profit
from its revenue.

Formula: Profit Margin Ratio = Net Income / Net Sales x 100

Interpretation:
• Higher Ratio: The company is earning more profit from its sales.
• Lower Ratio: The company has higher expenses compared to its sales.
THANK YOU

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