Financial Ratio Analysis
Introduction
General formulas and descriptions to help you get started
Check with Finance organization for company-specific formulas and definitions
Start by looking at year-over-year trends
To highlight inefficiencies, compare the current year ratio to 'benchmark' (competitor and/or industry average)
PERFORMANCE
GP/Sales	Gross Profits (GP) to Sales ratio = the proportion of sales that finds its way to Gross Profits. Higher the better...
NI/Sales	Net Income (NI) to Sales ratio = the proportion of sales that finds its way to net income (net profits). Higher the better...
ROE	Net Income / Average equity. Higher the better. Note: the denominator is usually an average over a 2 yr period.
OPERATING (AKA Liquidity): how easily a firm can lay its hands on cash
Current Ratio	Current Assets / Current Liability. Higher the better. More potential cash on hand. Similar to Net Working ing capital
	which is CA-CL.
EFFICIENCY: how efficiently a firm is using its assets
Sales/Assets:	Sales / Average Total Assets. A high ratio could indicate that firm is working close to capacity.
	Note: the denominator is an average ...i.e (Yr1+Yr/2).
Inv/Sales	Inventory (Inv) to Sales ratio = the proportion of sales that is consumed by inventory. Lower the better...
CGS/Inv	The proportion of inventory that is tied up in Cost of Goods Sold (CGS). Lower the better…
CGS/Sales	The proportion of sales that is tied up in CGS. Lower the better.
Invent Turns	CGS/Avg inventory = rate in which companies turn-over their inventory. Higher the better...
(Days)	Note: (Inv/(Net Sales/365 days)) will tell you the number of inventory days-on-hand.
Avg Collect	Average Receivables/ (Net Sales/365 days) = how quickly customers pay bills.
	Note: Average Receivables is an average over a 2 yr period.
(Days)	Note: (Average Receivables/(Net Sales/365 days)) will tell you the number of collection days.