1.

Traditional models of financial statements analysis

1.1. Horizontal or comparative analysis
1.2. Trend analysis
1.3. Vertical or ordinary-size analysis
1.4. Financial mix ratio analysis
1.4.1 Profitability ratios
1.4.2 Growth ratios
1.4.3 Liquidity ratios
1.4.4 Leverage ratios

2. The profitability ratios

2.1. Basic profitability ratios
Gross profit rate Gross profit / Net sales
Operating income rate Operating profit / Net sales
Profit margin (PM) Profit / Net sales
Return on Investment (Profit + Interest expense, net of tax) / Average
(ROI) Investment
Operating profit after tax / Average investment
Return on Equity (ROE) Profit / Average shareholders’ equity
Earnings Per Share (EPS) (Profit – Preference dividends requirements) /
Average ordinary shares outstanding

2.2. Du Pont Model

ROI Profit / Net Sales x Net Sales/ Average Investment
ROI Return on Sales x Assets Turnover
ROI ROS x AT
ROE (Profit / Net Sales) x (Net Sales / Investments) x (Investments /
Shareholders’ equity)
ROE ROS x AT x Equity Multiplier
ROA ROE x Equity ratio
ROE ROA / Equity ratio
EPS (Profit / Net Sales) x (Net Sales / Investments) x (Investments /
Shareholders’ equity) x (Shareholders’ equity / Ordinary shares
outstanding)
EPS ROS x AT x EM x Book value per share
BEPS (Net Income – Preference Dividend) / WAOSO

2.3. In the computation of EPS, the preference dividend requirements shall be treated as follows:
Cumulative Non-cumulative preference share
preference share
Dividends in arrears Excluded Excluded
Current dividend Included Included only when declared

3. The growth ratios

3.1. Basic growth ratios
Price-earnings (P/E) ratio MPPS / EPS
Dividend yield ratio DPS / MPPS
Dividend payout ratio DPS /EPS
Book value per preference share PSE / APSO
Book value per ordinary share OSE /AOSO
Market to book value per share MPPS / BVPS
where:
AOSO = Average ordinary shares outstanding
APSO = Average preference shares outstanding
BVPS = Book value per share
DPS = Dividend per share
EPS = Earnings per share
MPPS = Market price per share
OSE = Ordinary shareholders’ equity
PSE = Preference shareholders’ equity
 3.2. The preference and ordinary equity balances shall be determined as follows:
Total shareholders’ equity Px
- PSE
Liquidation (or callable) value Px
Applicable dividends x
OSE Px
3.3. The applicable dividend is determined by considering the dividends in arrears when the preference shares are cumulative.

4. The liquidity ratios

4.1. Basic operating ratios
Inventory days x
+ Collection period x
Operating cycle x
- Payment period x
Net cash cycle x

4.2. Turnovers and number of days:

Inventory turnover CGS / Inventory
Inventory days 365 / IT
Receivable turnover Net credit sales / Trade receivables
Collection period 365 / RT
Operating cycle IT + CP
Payable turnover Net credit purchases / Trade payables
Payment period 365 / PT
Net cash cycle OC – PP

4.3. Other liquidity ratios

Current ratio Current assets / Current liabilities
Quick assets ratio Quick assets / Current liabilities
Quick assets Cash + Marketable securities + Trade receivables
Defensive interval ratio Defensive assets / Average cash operating
expenses
Defensive assets Cash + Marketable securities + Trade receivables
Net working capital CA – CL
WC turnover Net sales / Ave. WC
Assets turnover Net sales / Ave. Total assets

5. The financial leverage ratios

5.1. Basic financial leverage ratios
Debt ratio Total debt / Total assets
1 – (1 / Equity multiplier)
(1 - Equity ratio)
1 – (Return on assets / Return on equity)
(Equity multiplier – 1) / Equity multiplier
D/E Ratio / (1 + D/E Ratio
Equity ratio Shareholders’ equity / Total assets
1 – Debt ratio
Return on assets / Return on equity
1 / Equity Multiplier
Debt-equity ratio Total Debt / Shareholders’ Equity
DRatio / (1 – DRatio)
Equity multiplier Total Equity / Shareholders’ Equity
1 + Debt-equity-ratio
1 / Equity Ratio
1 / (1 - Debt ratio)
Times interest earned EBIT / Interest expense
Financial leverage ratio EBIT / (EBIT – Interest expense – Preference
dividend requirement)
10.0 Summary of financial mix ratios

Ratios Formulas
Profitability Ratios
Return on sales Profit / Net sales
Gross profit rate Gross profit / Net sales
Return on investment Operating profit / Average total assets
Return on total assets Profit + Interest expense, net of tax / Average total assets
Return on shareholders’ equity Net income / Average shareholders’ equity
Return on ordinary shareholders’ equity Profit available to ordinary shareholders / Average ordinary shareholders’
equity
Operating leverage Contribution margin / Profit before interest and tax
Times preference dividend earned Profit / Preference dividend requirements
Earnings per share Profit – Preference dividends) / Average ordinary shares outstanding
Diluted earnings per share Adjusted PAOS / Ordinary shares outstanding + Ordinary share equivalents
Liquidity Ratios
Operating turnover Collection period + Inventory days
Inventory turnover Cost of goods sold / Average inventory
Inventory days (or Days to sell inventory) 365 days / Inventory turnover

Receivable turnover Net credit sales / Average trade receivables

Collection period 365 days / Receivable turnover
Payable turnover Net credit purchases / Average trade payables
Payable payment days 365 days / Payable turnover
Materials turnover Materials used / Average materials inventory
Work-in-process turnover Cost of goods manufactured / Average work-in-process inventory
Finished goods inventory Cost of goods sold / Average finished goods inventory
Cash turnover Cash operating expenses / Average cash balance
Days to pay operating expenses 365 days / Cash turnover
Working capital turnover Net sales / Average working capital
Assets turnover Net sales / Average total assets
Current assets turnover Net sales / Average current assets
Net working capital Current assets less current liabilities
Current assets ratio Current assets/current liabilities
Quick assets ratio Quick assets/Current liabilities
Growth Ratios
Price-earnings ratio (also called as “earnings Market price per share / Earnings per share
multiple)
Dividend-yield ratio Dividend per share / Market price per share
Dividend-payout ratio Dividend per share / Earnings per share
Book value per share Shareholders’ equity / Average shares outstanding
Leverage Ratios
Debt-to-equity ratio Total debt / Net shareholders’ equity
Debt-to-assets ratio Total debt / Total assets
Equity-to-assets ratio Net shareholders’ equity / Total assets
Equity multiplier Total assets (or equity) / Net shareholders’ equity
Times interest earned EBIT / Interest expense
Financial leverage EBIT / EBIT– Interest expense – Preference dividend before tax

Fixed charges rate Cash flows before fixed charges/Total fixed charges
Total assets-to-total liabilities ratio Total assets / Total liabilities
Non-current assets-to-long-term liabilities ratio Non-current assets / Long-term liabilities
5.2. The importance of cash flow motivates other financial analysts to develop cash flow ratios such as

Cash flow adequacy Cash from operations / Long-term debt

paid + Purchases of assets
Long-term debt payment Long-term debt payments / Cash from
operations
Dividend payout on cash from operations Dividends / Cash from operations
Reinvestment ratio Purchase of assets / Cash from
operations
Total debt coverage Total liabilities / Cash from operations
Depreciation-amortization impact Depreciation + Amortization / Cash from
operations
Cash flow to sales Cash from operations / Sales
Cash flow to net income Cash from operations / Income from
ordinary operations
Cash flow return on sales Cash from operations / Total assets