method used by interested parties such as investors, creditors, and management to evaluate the past, current, and projected conditions and performance of the firm. Ratio analysis is the most common form of financial analysis. It provides relative measures of the firm's conditions and performance. horizontal analysisand vertical analysisare also popular forms. Horizontal analysis is used to evaluate the trend in the accounts over the years, while vertical analysis, also called a common size financial statementdiscloses the internal structure of the firm. It indicates the existing relationship between sales and each income statement account. It shows the mix of assets that produce income and the mix of the sources of capital, whether by current or long-term debt or by equity funding. When using the financial ratios, a financial analyst makes two types of comparisons:
After completing the financial statement analysis, the firm's financial analyst will consult with management to discuss plans and prospects, any problem areas identified in the analysis, and possible solutions. Given below is a list of widely used financial ratios.
| Financial Statement Analysis: List of Ratios | |
| Liquidity | |
| Net Working Capital | Current Assets - Current Liabilities |
| Current Ratio | Current Assets Current Liabilities |
| Quick Ratio | Cash + Marketable Securities + Receivables Current Liabilities |
| Activity | |
| Accounts Receivable Turnover | Net Credit Sales Average Accounts Receivable |
| Average Collection Period | 365 Accounts Receivable Turnover |
| Inventory Turnover | Cost Of Goods Sold Average Inventory |
| Average Age of Inventory | 365 Inventory Turnover |
| Total Asset Turnover | Net Sales Average Total Assets |
| Leverage | |
| Debt Ratio | Total Debt Total Assets |
| Debt/Equity Ratio | Total Liabilities Stockholders' Equity |
| FINANCIAL STATEMENT AUDIT | |
| Times Interest Earned | Earnings Before Interest & Taxes Interest Expense |
| Profitability | |
| Gross Profit Margin | Gross Profit Net Sales |
| Profit Margin | Net Income Net Sales |
| Return On Total Assets | Net Income Average Total Assets |
| Return On Common Equity | Net Income Common Equity |
| Market Value | |
| Earnings Per Share | Net Income - Preferred Dividends Common Stock Outstanding |
| Price/Earnings Ratio | Market Price Per Share Earnings Per Share |
| Book Value Per Share | Stockholders' Equity - Preferred Stock Common Stock Outstanding |
| Dividend Yield | Dividends Per Share Market Price Per Share |
| Dividend Payout | Dividends Per Share Earnings Per Share |
