Financial Ratios Lecture Summary

Introduction

• Speaker: James from Accounting Stuff
• Topic: Financial Ratios
• Objective: Cover what Financial Ratios are, break them down into five main groups, and explain 25 Financial Ratios in 25 minutes.
• Acknowledgments to channel members for support.

Financial Statements

• Definition: Financial Ratio Analysis begins with financial statements summarizing a business's financial activities.
• Main Financial Statements:
  • Income Statement
  • Balance Sheet
  • Cash Flow Statement
• Most ratios can be derived from the Income Statement and Balance Sheet.

Income Statement

• Provides a summary of revenues and expenses over a period.
• Key components: Gross Profit, Operating Profit, Net Profit.
• Gross Profit Margin Calculation:
  • Gross Profit = Revenue - Cost of Sales
  • Gross Profit Margin = (Gross Profit / Revenue) x 100

Balance Sheet

• Snapshot of assets, liabilities, and equity at a point in time.

Financial Ratio Analysis

• Definition: Compares the size of one line item in a financial statement against another.
• Ratios are typically expressed as percentages.
• Types of Financial Ratios:
  • Profitability Ratios
  • Liquidity Ratios
  • Efficiency Ratios
  • Leverage Ratios
  • Price Ratios

Profitability Ratios

• Measure how efficiently a business generates profit from:
  • Revenue
  • Assets
  • Equity
  • Capital Employed

Margin Ratios

1. Gross Profit Margin:
   • Formula: Gross Profit / Revenue
2. Operating Profit Margin:
   • Formula: Operating Profit / Revenue
3. Net Profit Margin:
   • Formula: Net Profit / Revenue

Return Ratios

1. Return on Assets (ROA):
   • Formula: Net Profit / Total Assets
2. Return on Equity (ROE):
   • Formula: Net Profit / Total Equity
3. Return on Capital Employed (ROCE):
   • Formula: Operating Profit / Capital Employed

Liquidity Ratios

• Measure ability to cover short-term debt obligations.

Key Liquidity Ratios

1. Cash Ratio:
   • Formula: Cash / Current Liabilities
2. Quick Ratio:
   • Formula: Liquid Assets / Current Liabilities
3. Current Ratio:
   • Formula: Current Assets / Current Liabilities

Efficiency Ratios

• Measure effectiveness in managing inventory and collecting cash.

Turnover Ratios

1. Inventory Turnover Ratio:
   • Formula: Cost of Goods Sold / Inventory
2. Receivables Turnover Ratio:
   • Formula: Revenue / Accounts Receivable
3. Asset Turnover Ratio:
   • Formula: Revenue / Total Assets
4. Payables Turnover Ratio:
   • Formula: Cost of Goods Sold / Accounts Payable

Cash Conversion Cycle

• Formula: Days Sales of Inventory + Days Sales Outstanding + Days Payable Outstanding

1. Days Sales of Inventory:
   • Formula: (Inventory / Cost of Goods Sold) x 365
2. Days Sales Outstanding:
   • Formula: (Accounts Receivable / Revenue) x 365
3. Days Payable Outstanding:
   • Formula: (Accounts Payable / Cost of Goods Sold) x 365

Leverage Ratios

• Measure financial risk based on debt.

Key Leverage Ratios

1. Debt to Assets Ratio (DTA):
   • Formula: Total Liabilities / Total Assets
2. Debt to Equity Ratio (DTE):
   • Formula: Total Liabilities / Total Equity
3. Interest Coverage Ratio:
   • Formula: Operating Profit / Interest Expenses
4. Debt Service Coverage Ratio:
   • Formula: EBITDA / Total Debt Service

Price Ratios

• Used by investors to evaluate share price.

Key Price Ratios

1. Earnings per Share (EPS):
   • Formula: Net Profit / Common Shares Outstanding
2. Price-to-Earnings Ratio (P/E):
   • Formula: Share Price / EPS
3. Price-to-Earnings-to-Growth (PEG):
   • Formula: P/E / Expected EPS Growth
4. Dividends per Share (DPS):
   • Formula: Dividends Paid / Common Shares Outstanding
5. Dividend Yield Ratio:
   • Formula: DPS / Share Price
6. Dividend Payout Ratio:
   • Formula: Dividends Paid / Net Profit

Conclusion

• Overview of 25 Financial Ratios categorized into:
  • Profitability Ratios
  • Liquidity Ratios
  • Efficiency Ratios
  • Leverage Ratios
  • Price Ratios
• Financial Ratios Cheat Sheets available on the speaker's website for further reference.