Four classification of financial mix ratio analysis:

 Profitability ratios – ability of the business to generate profit. It measures the ability of the business to generate profit in relation to
sales, investments, assets, equities or common shares outstanding.
 Growth ratios – are indicative of the organization’s potential and attractiveness as an investment option.
 Liquidity ratios – refers to the ability of the business to pay its obligations in cash as they mature. Therefore, the focal point of the
liquidity analysis is cash. It includes the ability of the management to convert its current assets into cash in a quick, stable and regular
manner. It also deals with the ability of management to use trade credits and stretch the payments to trade credits in financing operating
activities. In short, the liquidity position of an organization is directly related to its operating activities and determines the speed of
revolving cash in the operating cycle.
 Financial Leverage ratios – refers to the use of debt to increase shareholders’ equity. Using debt to finance business activities would
mean greater exposure to the risk of insolvency. The more leveraged the business, the higher the risk of insolvency is. Financial leverage
is a measure of risk.

SUMMARY OF FINANCIAL MIX RATIOS

RATIOS FORMULAS COMMENTS

PROFITABILITY RATIOS

 Return on Sales Net income / Net sales  Also called as net profit rate; net profit margin; measures
profit percentage per peso sales

 Gross profit rate Gross profit / Net sales  Measures gross profit percentage on sales to recover
operating expenses

 Return on total assets Net income + Interest  Measures overall asset profitability; indicates how well
expense (net of tax) assets have been employed by management
Average total assets
 Return on stockholders’ Net income  Measures percentage of income derived for every peso
Average stockholders’ equity of owners’ equity.
equity

 Return on common Net income  Earnings available to common stockholders’ equals net
Average common income less preferred dividends; this ratio measures
stockholders’ equity stockholders’ equity percentage of profit derived for every peso of common
equity money used; when compared to the return on
total assets; it measures the percentage of profit derived
for every peso of common equity money used; when
compared to the return on total assets, it measures the
extent to which financial leverage is working for or
against common stockholders.

 Operating leverage Contribution margin  Measures the number of times profit will increase or
Earnings before interest and decrease in relation to change in net sales.
taxes (Operating income)
 Times preferred Net income  Measures the adequacy of current earnings to meet
Preferred dividend preferred dividend payments.
dividend earned requirements

LIQUIDITY RATIOS

 Operating turnover Collection period + Inventory  Measures the speed of the business cycle; the number of
days days cash was invested in the normal business operations
until it was recovered back

 Inventory turnover Cost of goods sold  Indicates the number of times inventories were acquired
Average Inventory and sold during the period

 Inventory days number of days in a year  Indicates the length of time spent before the average
inventory is sold to customers.
 inventory turnover  (note: know what will be the number of days to be
considered)
 Receivable turnover Net CREDIT sales  Indicates the efficiency in credit and collection policies;
Average trade receivables trade receivables include open account and on notes

 Collection period Number of days in a year  Measures quickness in collecting trade receivables
Receivable turnover
 Payable turnover Net credit purchases  Measures effectiveness in using trade credit facility from
Average trade payables suppliers

 Payable days Number of days in a year  Indicates the number of days spent before paying
Payable turnover liabilities to merchandise suppliers

 Materials turnover Materials USED  Indicates the number of times materials were used on
Average materials inventory the average during the period

 Work-in-process Cost of goods  Indicates the number of times average work-in-process

MANUFACTURED inventories is converted to finished goods
inventory turnover Average work-in-process
inventory
 Finished goods Cost of goods SOLD  Indicates the number of times average finished goods is
Average finished goods sold during the period
inventory turnover inventory
 Cash turnover Cash operating expenses  Measures the ability of the business to meet operating
Average cash balance expenses payments given a particular cash balance

 Days to pay operating Number of days in a year  Indicates the number of days spent before meeting
Cash turnover operating expense payments
expenses

 Working capital Net sales  Measures the adequacy and effective use of working
Average working capital capital; indicates reasonableness of the amount of
turnover current assets

 Asset turnover Net sales  Measures effectiveness of assets utilization

Average total assets
 Current assets turnover Net sales (excluding  Indicates the reasonableness of the amount of current
depreciation and assets
amortization)
Average current assets
 Net working capital Current assets – Current  Indicates the amount invested by the business to operate
liabilities its normal business activities

 Current ratio Current assets  Rough estimate on the ability of the business to meet its
Current liabilities currently maturing obligations; this ratio varies in great
disparity from one industry to another

 Quick assets ratio Quick assets  A more severe test of immediate liquidity to meet
Current liabilities currently maturing obligations
 (acid test ratio)  Quick assets include: cash, marketable
securities and receivables

 Defensive interval ratio Defensive assets  Measures the number of days defensive assets are
Average daily expenditures available to meet daily cash expenses
 Defensive assets include: cash, marketable
securities and trade receivable

GROWTH RATIOS

 Earnings per share (Net income – Preferred  Perhaps the most frequently quoted ratio of earnings
dividends) and growth performance; measures the value of
 Average common shares common stock by attributing to it a portion of the
outstanding company’s earnings

 Price-earnings ratio Market price per share  Measures the number of period investment in stock will
Earnings per share be recovered; measures the profitability of the firm in
relation to the market value of the stock; measures
investors’ beliefs on the growth potential of the stock
 Dividend yield ratio Dividend per share  Measures rate of cash return to investment in stock
Market price per share
 Dividend payout ratio Dividend per share  Represents the percentage of net income distributed as
Earnings per share dividends; a low ratio may indicate the reinvestment of
profits by a growth-oriented firm
 Book value per share Stockholders’ equity  Indicates the value of the stock on cost perspective; the
Average shares outstanding relevance of this ratio diminishes when the balance sheet
valuation does not approach fair market values; may be
computed for both common and preferred stocks

LEVERAGE RATIOS (Solvency ratios or Stability ratios)

 Debt-to-equity ratio Total debt  Measures the use of debt to finance operations; provides
Net stockholders’ equity a measure of the relative amount of resources
contributed by the creditors and owners

 Debt-to-assets ratio Total debt  Measures the relative shares of creditors over the total
Total assets resources of the firm
(debt ratio)

 Equity-to-assets ratio Net stockholders’ equity  Measures the amount of resources provided by the
Total assets owners in the firm
(equity ratio)

 Equity multiplier Total assets (equity)  Indicates the number of times owners’ equity is
Net stockholders’ equity multiplied
Or
1/ equity ratio
 Times interest earned Earnings before Interest and  Measures the long-term debt paying ability of the firm; a
Taxes (EBIT) high number of times interest is earned ratio indicates
Interest expense that the business is under-leveraged and its return on
common equity could still be improved.

 Financial leverage Earnings before interest and  Measures the risk associated in using debt to finance
taxes (EBIT) investments
(EBIT – Interest expense –
Preferred dividends before
tax

 Total (combined) Degree of operating leverage  Measures the overall leverage of the business; it indicates
x Degree of financial leverage the variability of the stockholders’ equity with respect to
leverage changes in contribution margin, earnings before interest
and taxes, interest expense and preferred dividends
before tax

 Fixed charges rate Cash flows before fixed  Measures the ability to meet fixed charges by cash
charges  Examples of fixed charges: rent, insurance, taxes
Total fixed charges and depreciation

 Total assets-to-total Total assets  Rough estimate of the firm’s ability to meet interest
Total liabilities payments to creditors
liabilities ratio
  Non-current assets-to- Non-current assets  Shows the capability to meet non-current liabilities using
Long-term liabilities non-current resources
long-term liabilities
ratio

CASH FLOW RATIOS

RATIOS FORMULAS
 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 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
 Cash flow liquidity ratio Cash + Marketable securities + Cash flow
from operating Activities
Current liabilities

OTHER RATIOS
OPERATING CYCLE Average collection period of receivable + Average
(liquidity & management efficiency) conversion period of Inventories + Days Cash
CAPITAL INTENSITY RATIO Total Assets
(liquidity & management efficiency) Net sales
SALES TO FIXED ASSETS (PLANT ASSET Net sales
TURNOVER) Average Fixed Assets (net)
(liquidity & management efficiency)
Net income
Average Owners’ equity
RATE OF RETURN ON OWNERS’ EQUITY Or
(solvency) Return on Assets x Equity multiplier

DIVIDENDS PER SHARE Dividends paid/declared

(stability) Common shares outstanding

RATE OF RETURN ON AVERAGE Net Income

CURRENT ASSETS Average Current Assets
(stability)
DAYS CASH Average cash balance
(liquidity and management efficiency) Cash operating costs
Number of days in a year
PERCENT OF EACH CURRENT ASSETS TO Amount of each current assets
TOTAL CURRENT ASSETS Total current assets