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Ratios: Financial Planning Ratios

Andrew Cummings
  • Updated

Overview

Main Menu Name: Ratios

Calculates 16 ratios used frequently in financial analysis. These ratios include liquidity, coverage, performance, utilization, and market ratios.

In this article:

Background

Ratios are frequently used in financial analysis. A ratio is an equation that identifies the relationship of one quantity to another, such as current assets ($20,000) to current liabilities ($8,000). Ratios are also expressed as percentages, such as 1 to 5 equals 20%.

Ratios are used to compare the business to be valued to:

  • The same business's ratio in previous years,
  • The ratios of competitors, and
  • A goal set by the business's owners and financial advisors.

Ratios are often used to measure the following:

  • The business's ability to meet its short-term obligations (liquidity ratios).
  • The business's long-range ability to provide security for creditors (debt, coverage, or leverage ratios).
  • The business's ability to generate a profit (performance ratios).
  • The business's ability to use assets effectively (utilization ratios).
  • The business's marketability (market measure ratio).

Accurate data is needed to calculate accurate ratios. This data can be obtained from company balance sheets and income statements.

 

 

Getting Started

Valuation frequently involves financial analysis to determine an accurate price for a business interest. Determining the price for a business interest in necessary for two reasons:

 

  1. To establish the financial status of the business to be valued, and
  2. To find a publicly traded business which is comparable to the closely held business (the value of the publicly traded business is then used to determine the value of the closely held business).

Ratios are frequently used in financial analysis. A ratio is an equation, which identifies the relationship of one quantity to another, such as current assets ($20,000) to current liabilities ($8,000). Ratios are also expressed as percentages, such as 1 to 5 equals 1ΒΈ 5 (20%).

Ratios are used to compare the business to be valued to the same business's ratio in previous years, the ratios of competitors, and a goal set by the business's owners and financial advisors.

Ratios are often used to measure the following:

 

  • The business's ability to meet its short-term obligations (liquidity ratios).
  • The business's long-range ability to provide security for creditors (debt, coverage, or leverage ratios).
  • The business's ability to generate a profit (performance ratios).
  • The business's ability to use assets effectively (utilization ratios).
  • The business's marketability (market measure ratio).

Accurate data is needed to calculate accurate ratios. This data can be obtained from balance sheets and income statements.

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Entering Data

Enter information for up to two companies.

  1.  Company:  Enter the name of the company. Once you exit this entry field, the name of the company will appear on the tab.
  2.  Cash:  Enter the amount of cash retained by the business.
  3.  Accounts Receivable:  Enter the amount of the accounts receivable retained by the business.
  4.  Inventory:  Enter the value of the inventory retained by the business.
  5.  Current Assets:  Enter the value of the assets currently retained by the business.
  6.  Current Liabilities:  Enter the value of the liabilities currently retained by the business.
  7.  Working Capital:  Enter the amount of working capital retained by the business.
  8.  Fixed Assets:  Enter the value of the fixed assets currently retained by the business.
  9.  Total Assets:  Enter the value of all the assets retained by the business.
  10.  Long Term Debt:  Enter the amount of long term debts retained by the business.
  11.  Total Liabilities:  Enter the total value of liabilities retained by the business.
  12.  Net Worth:  Enter the net worth value of the business.
  13.  Sales:  Enter the amount of sales in terms of dollars made by the business.
  14.  Gross Profit (Margin):  Enter the amount of gross profit made by the business.
  15.  Operating Profit:  Enter the amount of operating profit made by the business.
  16.  Inc. Before Interest + Tax:  Enter the amount of income made by the business before interest and taxes are applied.
  17.  Interest Expenses:  Enter the amount of interest expenses applied to the business's income.
  18.  Net Income:  Enter the amount of net income made by the business.

 

Results

The program provides a list of 16 ratios for two companies (or for different years of the same company). These ratios are commonly used in financial analysis. The results show the value for each type of ratio.

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