How To Learn Ratio Analysis Formulas In 15 Minutes
Learning ratio analysis formulas is not easy, but with a few simple tips by the experts,
It will become a piece of cake for you.
Ratio Analysis What is Ratio Analysis?
So basically, Ratio Analysis is a process to gain a deeper
insight into the financial health of a company by comparing and analyzing the information
provided in the financial statements.
Ratio Analysis Formulas To compare and analyze the information recorded
in the financial statements, certain formulas are used. Let’s have a look at them.
Liquidity Ratio Profitability Ratio
Working Capital Ratio Capital Structure Ratio
Overall Profitability Ratio
Liquidity Ratio The first one is the liquidity ration which
is also known as solvency ratio. It focuses on the company’s current assets and liabilities
to analyze if it can pay the short term debts. The three common liquidity ratios and their
formulas are: Current Ratio Current Assets Upon Current
Liabilities Quick Ratio Liquid Assets Upon Current Liabilities
Absolute Liquid Ratio Absolute Liquid Assets Upon Current Liabilities
Profitability Ratio Another ratio is the profitability ratio that
analyzes how a company uses its assets and how effectively it generates the profit from
the equities and assets. Let’s take a look at some examples of profit ratio and their
formulas. Gross Profit Ratio Gross Profit Upon Net Sales
multiply by 100 Operating Profit Ratio Operating Profit Upon
Net Sales multiply by 100 Net Profit Ratio Operating Profit Upon Net
Sales multiply by 100
Working Capital Ratio The next one on the list is the working capital
ratio. This ratio analyzes if the company can pay off the current debts or liabilities
using the current assets. Some of the common working capital ratios and their formulas
are: Inventory Ratio Net Sales / Inventory
Debtors Turnover Ratio Total Sales Upon Account Receivables
Debt Collection Ratio Receivables multiply by Months or days in a year Upon Net Credit
Sales for the year
Capital Structure Ratio Capital structure ratio is one of the important
financial ratios that analyzes how structurally a firm uses the capital or funds to finance
its operations. The examples and formulas of capital structure ratio are:
Debt Equity Ratio Total Long Term Debts Upon Shareholders Fund
Proprietary Ratio Shareholders Fund Upon Total Assets
Capital Gearing Ratio Equity Share Capital Upon Fixed Interest Bearing Funds
Overall Profitability Ratio The last ratio is overall profitability ratio
that measures how profitable a particular firm or company is, or how it can turn its
assets and capital into profits for future use. An example of overall profitable ratio
and its formula is: Overall Profit Ability Ratio Net Profit Upon
Total Assets
Tips to Learn Ratio Analysis Formulas Easily 1.Understand
2.Categorize The first tip is to understand all the ratios
because simply trying to memorize them will make it difficult to remember them. So, try
to understand all the ratios so that they can stick to your memory. Write down each
ratio and work each out several times using different numbers until you have a firm grasp
of what each one means. The second tip is to categorize each set of
financial ratios according to the type of information it provides. Market Valuation,
Liquidity, Profitability, Efficiency, Coverage, and Leverage are six categories in which you
can place the most financial ratios.
3.Prioritize 4.Create Visual Representation
Prioritizing the key financial ratios is an amazing tip that should be followed. So, prioritize
and learn the most important ones first to remember them easily. Pick out the five most
important ratios and learn them well until they stick to your brain.
And last but not least, try to create an elaborate visual representation of each element of the
financial ratios in your head to learn them easily. Connect each symbol by creating a
story to keep them all together. This will be very helpful since our mind's tendency
to remember in pictures is higher than words or symbols.
With these tips, it will only take you 15 minutes to learn the financial ration formulas
and store them in your head. Stay tuned to our YouTube channel for more
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