Common-size statements recast all items in a

particular financial statement as a percentage

of a selected (usually the largest and/or most
important) item on the statement. These
statements can be used to
Basic Financial • Compare elements in a single year's
financial statements.
Statement Analysis • Analyze trends across a number of years for
one business.
• Compare businesses of differing sizes within
an industry.
• Compare the company's performance and
position with an industry average.
Common-size statements
Vertical common-size statements, a base A horizontal common-size statement, also
amount (generally total assets on the called a variation analysis or trend
balance sheet and net sales on the analysis, compares key financial statement
income statement) is valued at 100%, and values and relationships for the same
the elements within the statement are
expressed as a percentage of the base company over a period of years. The
amount. increase or decrease in each of the major
accounts is shown as a percentage of the
base-year amount and hence is sometimes
referred to as the base-year financials.
Introduction to
Financial Ratios
Financial ratios are essential tools for understanding a company's financial
financial health and performance. These metrics provide a concise way to
way to analyze key aspects of a business, enabling informed decision-making
making and strategic planning.
Liquidity Ratios
&
CR = QR = CaR =

1 Current Ratio 2 Quick Ratio (Acid- 3 Cash Ratio

Test Ratio)
The current ratio measures The cash ratio looks at the
measures a company's The quick ratio is a more the proportion of cash and
ability to pay off its short- more stringent measure of and cash equivalents a
short-term liabilities with measure of liquidity, company has to cover its
with its current assets. A focusing on the most liquid its short-term liabilities.
A high current ratio liquid current assets like liabilities. This ratio
indicates strong liquidity like cash, marketable provides the most
liquidity and the ability to securities, and accounts conservative view of a
to cover short-term accounts receivable. It company's liquidity
obligations. excludes inventory, which position.
which is less liquid.
Profitability Ratios

PM = ROA = ROE =
Profit Margin Return on Assets (ROA) Return on Equity (ROE)
Profit margin measures the ROA measures how efficiently a ROE measures how much profit a
percentage of revenue that a company uses its assets to company generates with the
company retains as profit. It's a generate earnings. It provides money shareholders have invested.
a key indicator of a company's insight into how profitably a It's a crucial metric for investors to
company's pricing power and company is deploying its capital. A assess a company's profitability and
operational efficiency. A high higher ROA generally indicates a ability to generate returns. A
profit margin suggests the more efficient and profitable consistently high ROE can signal an
business is well-managed and business model. effectively managed, highly
and competitive within its profitable business.
industry.
Leverage Ratios Debt-to-Assets Ratio

The debt-to-assets ratio

compares a company's total debt
D/E = to its total assets. It shows the
Debt-to-Equity Ratio proportion of a company's assets
that are financed through debt.
This ratio measures a company's A lower ratio indicates the
financial leverage by dividing its total company has more assets than
liabilities by its total shareholders' debt, which can make it less risky
equity. It indicates how much debt a and more attractive to investors.
company is using to finance its
operations compared to the amount
of equity funding. A higher ratio
suggests the company is more heavily DR =
reliant on debt, which can increase
financial risk.
Efficiency Ratios
ATo = ITo = ARTo =

Asset Turnover Ratio Inventory Turnover Receivables Turnover

Ratio Turnover Ratio
This ratio measures how
efficiently a company uses its This ratio measures how This ratio measures how
its assets to generate sales. It quickly a company sells and quickly a company collects on
It shows how much revenue is and replaces its inventory. It on its accounts receivable. It
revenue is generated for every It provides insight into how It shows how efficiently the
every dollar invested in assets. how efficiently a company company manages credit
assets. A higher ratio indicates manages its inventory levels. A extended to customers. A
indicates more efficient asset levels. A higher ratio indicates higher ratio indicates faster
asset utilization. indicates faster inventory collection of receivables and
turnover and more efficient and more efficient working
efficient inventory capital management.
management.
Interpreting Financial Ratios
Interpreting financial ratios requires a nuanced understanding of the underlying
underlying business context. Ratios should not be evaluated in isolation, but
isolation, but rather in relation to industry benchmarks, historical performance,
performance, and the company's strategic objectives. Identifying trends over
trends over time and comparing to competitors can provide valuable insights
insights into a company's financial health and operating efficiency.

Careful analysis of ratio changes can uncover potential issues or opportunities.

For example, a declining current ratio may signal liquidity concerns, while rising
profit margins could indicate improved pricing power. Ratios should be viewed
holistically to gain a comprehensive picture of a company's financial position and
make informed business decisions.
Limitations of Financial Ratios
While financial ratios provide valuable insights into a company's financial health,
they have certain limitations. Ratios are based on historical data, which may not
accurately reflect a company's future performance. Additionally, ratios can be
influenced by accounting practices, making it challenging to compare companies
across industries or over time. Ratios also fail to capture intangible assets and
may not fully account for a company's risk profile or competitive positioning.

Furthermore, financial ratios do not consider the company's strategic priorities

priorities or management decisions, which can significantly impact long-term
long-term success. Investors and analysts must interpret ratios within the
the broader context of the company's operations, market conditions, and
and management's vision to gain a comprehensive understanding of the
the organization's financial well-being.
Industry Benchmarking
Comparing a company's financial ratios to industry benchmarks is a crucial step in evaluating its financial health
financial health and performance. By analyzing how a company's metrics stack up against its peers, analysts can
analysts can identify areas of strength, weakness, and opportunities for improvement.

15% 1.8x 25%

Average ROA Debt-to-Equity Ratio Gross Profit Margin
The average return on assets The typical debt-to-equity ratio The industry's average gross profit
(ROA) for the industry, providing a for companies in the same sector, profit margin, a key indicator of
benchmark for evaluating the helping assess the company's of operational efficiency and
company's profitability. capital structure and leverage. pricing power.

By benchmarking against industry peers, companies can identify areas where they excel or fall behind, guiding
behind, guiding strategic decisions to improve competitiveness and drive long-term success.
Conclusion and Key
Takeaways
In this presentation, we have explored the essential financial ratios that provide
that provide valuable insights into a company's liquidity, profitability, leverage,
leverage, efficiency, and valuation. By understanding these ratios and their
their implications, you can make more informed decisions and gain a deeper
deeper understanding of a company's financial health and performance.
performance.