Financial Statements

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Financial Statement Ratio Analysis

When you are analyzing a financial statement, it is best to reduce amount comparisons to percentages or ratios so that you have an easy way to judge those comparisons. And if you compare those ratio results with what you know to be good, fair or bad, you have a way of determining the health of a business.

Simply put, ratio analysis is changing amount comparisons to ratios and then comparing those ratios to a known standard.

Ratios to Determine Strength & Weaknesses

Everyone in the business of analyzing financial statements has a few favorite ratios they utilize when determining the strengths or weaknesses of a specific financial statement. The ratios that are used could change depending upon the industry the business is in, the size of the business, the accounting method that is used by the business and the amount of the credit desired and how healthy the company is.

Common Ratios

The following are a list of common ratios, their formulas

Ratio Name	Formula

Current Ratio	Current Assets / Current Liabilities

Quick Ratio	(Cash + Marketable Securities + A/R) / Current Liabilities

Working Capital	Current Assets - Current Liabilities

Current Debt to N/W	Current Liabilities / Net Worth

Total Debt to N/W	Total Liabilities / Net Worth

Net Income Percent	(Net Profit / Net Sales) * 100

Gross Profit Percent	(Gross Profit / Net Sales) * 100

Days Sales Outstanding	Net Sales / A/R = Turns Days in Period / Turns = DSO

Inventory (In Days)	COGS / Inventory = Turns Days in Period / Turns = Inventory Days

Payables (In Days)	COGS / A/P = Turns Days in Period / Turns = Payable Days

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