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Financial Statement Ratio Analysis

When you are analyzing a financial statement, it is best to reduce amount comparisons to percentages or ratios so that you have an easy way to judge those comparisons. And if you compare those ratio results with what you know to be good, fair or bad, you have a way of determining the health of a business.

Simply put, ratio analysis is changing amount comparisons to ratios and then comparing those ratios to a known standard.

Ratios to Determine Strength & Weaknesses

Everyone in the business of analyzing financial statements has a few favorite ratios they utilize when determining the strengths or weaknesses of a specific financial statement. The ratios that are used could change depending upon the industry the business is in, the size of the business, the accounting method that is used by the business and the amount of the credit desired and how healthy the company is.

Common Ratios

The following are a list of common ratios, their formulas 

Ratio Name Formula
Current Ratio Current Assets / Current Liabilities
Quick Ratio (Cash + Marketable Securities + A/R) / 
Current Liabilities
Working Capital Current Assets - Current Liabilities
Current Debt to N/W Current Liabilities / Net Worth
Total Debt to N/W Total Liabilities / Net Worth
Net Income Percent (Net Profit / Net Sales) * 100
Gross Profit Percent (Gross Profit / Net Sales) * 100
Days Sales Outstanding Net Sales / A/R = Turns 
Days in Period / Turns = DSO
Inventory (In Days) COGS / Inventory = Turns
Days in Period / Turns = Inventory Days
Payables (In Days) COGS / A/P = Turns
Days in Period / Turns = Payable Days

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