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1. What are Liquidity Ratios?
Liquidity ratios show whether a business can pay its short-term debt as it matures. There are four types of liquidity ratios: current ratio, cash ratio, acid-test ratio, and stock dependency ratio. The following calculations can be made to perform financial ratio analysis using these values:
How to Calculate the Current Ratio?
The current ratio, which is preferred to be above 2 in terms of working capital adequacy, is calculated as follows:
Current Ratio = Current Assets / Short-Term Foreign Resources
How to Calculate Acid-Test Ratio?
The acid-test ratio, which is expected to be above 1 to indicate that the business can pay its short-term debts, is calculated as follows:
Acid-Test Ratio = (Current Assets - Inventories) / Short-Term Foreign Resources
How to Calculate Cash Rate?
The cash ratio, which determines whether short-term debts can be paid using existing capital if there is no cash flow to the business throughout the year, is calculated as follows:
Cash Ratio = (Securities + Liquid Assets) / Short-Term Foreign Resources
How to Calculate Stock Dependency Ratio?
The stock dependency ratio is an analysis that determines what percentage of the existing stock must be sold to pay short-term debts. The stock dependency ratio, whose high value indicates an increased dependency on stocks, is calculated as follows:
Stock Dependency Ratio = [ Short-Term Foreign Resources - ( Securities + Liquid Assets ) ] / Stocks
2. What are Financial Structure Ratios?
Financial structure ratios express the extent to which the capital of businesses consists of debt-based financing. These values, which are used to analyze the long-term financial structures and risk situations of companies, are also called debt ratios. Financial structure ratios that reveal the ratio between capital and debt are as follows:
How to Calculate Leverage Ratio?
This value, which shows the percentage of working capital originating from borrowing, is expected to be below 50% in order not to indicate financial risk. The leverage ratio, which shows the ratio of debts to all business assets, is calculated as follows:
Leverage Ratio = Total Debt / Total Assets
How to Calculate Equity Ratio?
This value, also known as the financing rate, is expected to be above 1%. If this value is above 1%, it indicates that the business does not need to borrow in terms of capital. The financing rate calculation is made as follows:
Equity Ratio = Equity / (Short + Long Term Foreign Resources)
How to Calculate Autofinancing Rate?
Auto-financing, which means that the business creates equity capital from the profit it earns, is calculated as follows:
Auto-financing = (Profit Reserves - Previous Years Losses) / Paid-in Capital
How to Calculate Short-Term Debt Ratio?
This value, which shows the extent to which working capital is covered by short-term debts, is calculated as follows:
Short-Term Debt Ratio = Short-Term Debts / Total Liabilities
How to Calculate Long-Term Debt Ratio?
This value, which expresses the proportion of the company's capital consisting of long-term debts, is calculated as follows:
Long-Term Debt Ratio = Long-Term Debts / Total Liabilities
3. What are Profitability Ratios?
Profitability ratios, one of the most frequently used financial analysis values; show how much profitability can be achieved with the company's equity capital, operating expenses, and balance sheet. A high ratio is expected, indicating that the business is performing strongly by generating cash flow. However, a more accurate analysis can be made by comparing these values with past period rates and the rates obtained by other companies in the sector. Profitability ratios and calculation methods that help make financial ratio analysis are as follows:
How to Calculate Economic Profitability?
A high ratio, also known as economic profitability, indicates the effective use of working capital.
Economic Profitability = Profit Before Interest and Tax / Total Assets or Liabilities
How to Calculate Return on Assets?
This ratio, which is expected to be high, shows the size of the profit the business makes from its investments.
Return on Assets = Net Profit for the Period / Assets
How to Calculate Return Per Share?
Obtaining a high ratio as a result of the calculation indicates that the company's stock value is high.
Return per Share = Net Profit / Number of Shares in Circulation
How to Calculate Return on Investment?
Return on investment, one of the widely used financial ratio analyses, expresses how much profit is made from a project according to the investment made by the business.
Return on Investment = Total Investment Profit / Total Amount of Investment
There are many other profitability ratios other than these widely used ratios, whose calculation methods are given. Other profitability ratios such as cumulative profitability ratio, business volume profitability, and current asset profitability can be determined according to the field in which the business wants to conduct financial analysis. It is useful to analyze such values, which will be taken from the financial statements and proportioned, in comparison with other figures obtained. In this way, the financial situations of businesses can be addressed in a multifaceted manner and the necessary strategic steps can be taken.
