RATIO/BUILDING FORMULA WHAT IT MEASURES ACCEPTABLE
BLOCK
LEVEL
PROFITABILITY
LIQUIDITY& ASSET MANAGEMENT
SOLVENCY
MARKET PROSPECTS
The ratio/building formula measures several aspects of a company's financial health and performance. Here is what each measure typically represents:
1. BLOCK: This measure determines the efficiency of a company's operations and how well it utilizes its resources. It assesses factors such as the utilization of capital, labor, and materials, indicating whether the company is effectively using its assets.
2. LEVEL: This measure evaluates the company's level of productivity and output. It indicates the efficiency of production processes, such as the level of output per employee or per unit of input.
3. PROFITABILITY: This measure assesses the company's ability to generate profit from its operations. It includes ratios like gross profit margin, net profit margin, return on investment (ROI), and return on equity (ROE). Higher profitability ratios indicate better financial performance.
4. LIQUIDITY & ASSET MANAGEMENT: This measure analyzes a company's ability to meet its short-term obligations and efficiently manage its assets. Common ratios for liquidity include the current ratio and quick ratio, which measure the company's ability to cover its current liabilities with current assets. Additionally, asset management ratios like inventory turnover, accounts receivable turnover, and fixed asset turnover measure how well a company utilizes its assets to generate revenue.
5. SOLVENCY: This measure evaluates a company's long-term financial stability and its ability to meet long-term obligations. Solvency ratios include the debt-to-equity ratio, equity ratio, and interest coverage ratio, which measure the extent to which a company relies on debt financing and its ability to meet interest payments.
6. MARKET PROSPECTS: This measure gauges investors' perception of a company's future prospects and its ability to create shareholder value. It includes indicators such as the price-to-earnings (P/E) ratio, market capitalization, and dividend yield. Higher market prospects suggest that investors anticipate future growth and profitability for the company.
In summary, the ratio/building formula measures various aspects of a company's financial performance, including efficiency, profitability, liquidity, solvency, asset management, and market prospects. Companies aim for acceptable levels in each of these categories to showcase their financial health and attract investors.
The formulas and ratios that measure different aspects of a company's financial performance include:
1. Profitability ratios:
- Gross profit margin = (Gross profit / Sales) * 100
- Net profit margin = (Net profit / Sales) * 100
- Return on assets (ROA) = (Net profit / Total assets) * 100
- Return on equity (ROE) = (Net profit / Shareholders' equity) * 100
2. Liquidity and asset management ratios:
- Current ratio = Current assets / Current liabilities
- Quick ratio = (Current assets - Inventory) / Current liabilities
- Inventory turnover = Cost of goods sold / Average inventory
- Accounts receivable turnover = Net credit sales / Average accounts receivable
- Asset turnover = Sales / Average total assets
3. Solvency ratios:
- Debt-to-equity ratio = Total debt / Shareholders' equity
- Debt ratio = Total debt / Total assets
- Interest coverage ratio = Earnings before interest and tax (EBIT) / Interest expense
4. Market prospect ratios:
- Price-to-earnings (P/E) ratio = Market price per share / Earnings per share
- Dividend yield = Dividends per share / Market price per share
- Price-to-sales (P/S) ratio = Market price per share / Sales per share
- Market capitalization = Number of outstanding shares * Market price per share
Please note that the formulas provided are simplified versions, and there may be variations depending on industry standards or specific requirements.