thesis of ratio analysis

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What Is Ratio Analysis?

• What Does It Tell You?
• Application

The Bottom Line

• Corporate Finance
• Financial Ratios

Financial Ratio Analysis: Definition, Types, Examples, and How to Use

Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational efficiency, and profitability by studying its financial statements such as the balance sheet and income statement. Ratio analysis is a cornerstone of fundamental equity analysis .

Key Takeaways

• Ratio analysis compares line-item data from a company's financial statements to reveal insights regarding profitability, liquidity, operational efficiency, and solvency.
• Ratio analysis can mark how a company is performing over time, while comparing a company to another within the same industry or sector.
• Ratio analysis may also be required by external parties that set benchmarks often tied to risk.
• While ratios offer useful insight into a company, they should be paired with other metrics, to obtain a broader picture of a company's financial health.
• Examples of ratio analysis include current ratio, gross profit margin ratio, inventory turnover ratio.

Investopedia / Theresa Chiechi

What Does Ratio Analysis Tell You?

Investors and analysts employ ratio analysis to evaluate the financial health of companies by scrutinizing past and current financial statements. Comparative data can demonstrate how a company is performing over time and can be used to estimate likely future performance. This data can also compare a company's financial standing with industry averages while measuring how a company stacks up against others within the same sector.

Investors can use ratio analysis easily, and every figure needed to calculate the ratios is found on a company's financial statements.

Ratios are comparison points for companies. They evaluate stocks within an industry. Likewise, they measure a company today against its historical numbers. In most cases, it is also important to understand the variables driving ratios as management has the flexibility to, at times, alter its strategy to make it's stock and company ratios more attractive. Generally, ratios are typically not used in isolation but rather in combination with other ratios. Having a good idea of the ratios in each of the four previously mentioned categories will give you a comprehensive view of the company from different angles and help you spot potential red flags.

A ratio is the relation between two amounts showing the number of times one value contains or is contained within the other.

Types of Ratio Analysis

The various kinds of financial ratios available may be broadly grouped into the following six silos, based on the sets of data they provide:

1. Liquidity Ratios

Liquidity ratios measure a company's ability to pay off its short-term debts as they become due, using the company's current or quick assets. Liquidity ratios include the current ratio, quick ratio, and working capital ratio.

2. Solvency Ratios

Also called financial leverage ratios, solvency ratios compare a company's debt levels with its assets, equity, and earnings, to evaluate the likelihood of a company staying afloat over the long haul, by paying off its long-term debt as well as the interest on its debt. Examples of solvency ratios include: debt-equity ratios, debt-assets ratios, and interest coverage ratios.

3. Profitability Ratios

These ratios convey how well a company can generate profits from its operations. Profit margin, return on assets, return on equity, return on capital employed, and gross margin ratios are all examples of profitability ratios .

4. Efficiency Ratios

Also called activity ratios, efficiency ratios evaluate how efficiently a company uses its assets and liabilities to generate sales and maximize profits. Key efficiency ratios include: turnover ratio, inventory turnover, and days' sales in inventory.

5. Coverage Ratios

Coverage ratios measure a company's ability to make the interest payments and other obligations associated with its debts. Examples include the times interest earned ratio and the debt-service coverage ratio .

6. Market Prospect Ratios

These are the most commonly used ratios in fundamental analysis. They include dividend yield , P/E ratio , earnings per share (EPS), and dividend payout ratio . Investors use these metrics to predict earnings and future performance.

For example, if the average P/E ratio of all companies in the S&P 500 index is 20, and the majority of companies have P/Es between 15 and 25, a stock with a P/E ratio of seven would be considered undervalued. In contrast, one with a P/E ratio of 50 would be considered overvalued. The former may trend upwards in the future, while the latter may trend downwards until each aligns with its intrinsic value.

Most ratio analysis is only used for internal decision making. Though some benchmarks are set externally (discussed below), ratio analysis is often not a required aspect of budgeting or planning.

Application of Ratio Analysis

The fundamental basis of ratio analysis is to compare multiple figures and derive a calculated value. By itself, that value may hold little to no value. Instead, ratio analysis must often be applied to a comparable to determine whether or a company's financial health is strong, weak, improving, or deteriorating.

Ratio Analysis Over Time

A company can perform ratio analysis over time to get a better understanding of the trajectory of its company. Instead of being focused on where it is today, the company is more interested n how the company has performed over time, what changes have worked, and what risks still exist looking to the future. Performing ratio analysis is a central part in forming long-term decisions and strategic planning .

To perform ratio analysis over time, a company selects a single financial ratio, then calculates that ratio on a fixed cadence (i.e. calculating its quick ratio every month). Be mindful of seasonality and how temporarily fluctuations in account balances may impact month-over-month ratio calculations. Then, a company analyzes how the ratio has changed over time (whether it is improving, the rate at which it is changing, and whether the company wanted the ratio to change over time).

Ratio Analysis Across Companies

Imagine a company with a 10% gross profit margin. A company may be thrilled with this financial ratio until it learns that every competitor is achieving a gross profit margin of 25%. Ratio analysis is incredibly useful for a company to better stand how its performance compares to similar companies.

To correctly implement ratio analysis to compare different companies, consider only analyzing similar companies within the same industry . In addition, be mindful how different capital structures and company sizes may impact a company's ability to be efficient. In addition, consider how companies with varying product lines (i.e. some technology companies may offer products as well as services, two different product lines with varying impacts to ratio analysis).

Different industries simply have different ratio expectations. A debt-equity ratio that might be normal for a utility company that can obtain low-cost debt might be deemed unsustainably high for a technology company that relies more heavily on private investor funding.

Ratio Analysis Against Benchmarks

Companies may set internal targets for their financial ratios. These calculations may hold current levels steady or strive for operational growth. For example, a company's existing current ratio may be 1.1; if the company wants to become more liquid, it may set the internal target of having a current ratio of 1.2 by the end of the fiscal year.

Benchmarks are also frequently implemented by external parties such lenders. Lending institutions often set requirements for financial health as part of covenants in loan documents. Covenants form part of the loan's terms and conditions and companies must maintain certain metrics or the loan may be recalled.

If these benchmarks are not met, an entire loan may be callable or a company may be faced with an adjusted higher rate of interest to compensation for this risk. An example of a benchmark set by a lender is often the debt service coverage ratio which measures a company's cash flow against it's debt balances.

Examples of Ratio Analysis in Use

Ratio analysis can predict a company's future performance — for better or worse. Successful companies generally boast solid ratios in all areas, where any sudden hint of weakness in one area may spark a significant stock sell-off. Let's look at a few simple examples

Net profit margin , often referred to simply as profit margin or the bottom line, is a ratio that investors use to compare the profitability of companies within the same sector. It's calculated by dividing a company's net income by its revenues. Instead of dissecting financial statements to compare how profitable companies are, an investor can use this ratio instead. For example, suppose company ABC and company DEF are in the same sector with profit margins of 50% and 10%, respectively. An investor can easily compare the two companies and conclude that ABC converted 50% of its revenues into profits, while DEF only converted 10%.

Using the companies from the above example, suppose ABC has a P/E ratio of 100, while DEF has a P/E ratio of 10. An average investor concludes that investors are willing to pay $100 per $1 of earnings ABC generates and only $10 per $1 of earnings DEF generates.

What Are the Types of Ratio Analysis?

Financial ratio analysis is often broken into six different types: profitability, solvency, liquidity, turnover, coverage, and market prospects ratios. Other non-financial metrics may be scattered across various departments and industries. For example, a marketing department may use a conversion click ratio to analyze customer capture.

What Are the Uses of Ratio Analysis?

Ratio analysis serves three main uses. First, ratio analysis can be performed to track changes to a company over time to better understand the trajectory of operations. Second, ratio analysis can be performed to compare results with other similar companies to see how the company is doing compared to competitors. Third, ratio analysis can be performed to strive for specific internally-set or externally-set benchmarks.

Why Is Ratio Analysis Important?

Ratio analysis is important because it may portray a more accurate representation of the state of operations for a company. Consider a company that made $1 billion of revenue last quarter. Though this seems ideal, the company might have had a negative gross profit margin, a decrease in liquidity ratio metrics, and lower earnings compared to equity than in prior periods. Static numbers on their own may not fully explain how a company is performing.

What Is an Example of Ratio Analysis?

Consider the inventory turnover ratio that measures how quickly a company converts inventory to a sale. A company can track its inventory turnover over a full calendar year to see how quickly it converted goods to cash each month. Then, a company can explore the reasons certain months lagged or why certain months exceeded expectations.

There is often an overwhelming amount of data and information useful for a company to make decisions. To make better use of their information, a company may compare several numbers together. This process called ratio analysis allows a company to gain better insights to how it is performing over time, against competition, and against internal goals. Ratio analysis is usually rooted heavily with financial metrics, though ratio analysis can be performed with non-financial data.

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Thesis Station

Thesis: the impact of financial ratio analysis on financial decisions.

Sample Thesis Paper

The objective of the current study is to estimate the impact of financial ratio analysis on financial decisions for financial institutions and investors who invest in their publicly listed stocks.

1.3       Rationale for Objective

The purpose of the current study is to develop further on previous researches carried out regarding the use of financial ratio analysis for evaluation of companies’ performance. The subject topic is an interesting one as this will examine use of financial ratios by both financial institutions and private investors in an emerging economy of Pakistan. The banking sector in Pakistan has grown tremendously over the last 10 years after induction of banking reforms. Therefore a study of one of the largest banks in Pakistan along with competitive analysis would provide the reader a thorough insight into the correlation of publicly listed company’s financial performance and its stock prices.

1.4       Project Aim

The objective clearly sets out the project aim for the current dissertation . The study will cover the financial ratio analysis highlighting different ratios which are commonly used by companies and shareholders to evaluate the financial position of the company at any point in time. However, the availability of up to date companies’ information is somewhat limited for its external users. This restricts the use of financial ratio analysis by shareholders. Management of a company is considered as internal user and shareholders or investment companies or research analysts are considered as external users. The study will estimate the impact of financial ratios on financial decisions of both internal users and external users of information. A case study of Muslim Commercial Bank, a local bank incorporated in Pakistan would be investigated and compared with its competitor bank – Habib Bank Limited that is also based in Pakistan. Both primary and secondary sources will be collected and subject to different analytical procedures. For primary results Likert modeling will be used to determine the level of impact on financial decisions. While on the other hand secondary sources will be used for performing a financial ratio analysis of the banks under review. Overall conclusions regarding the topic will be presented in the final chapter of the current dissertation.

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Master's Theses

Ratio analysis of financial statements

Donald Eugene Furr

Date of Award

Spring 1957

Document Type

Degree name.

Master of Science

Business Administration

The twentieth century has been witness to a phenomenal rate of growth in accounting. To a large degree this growth can be attributed to large scale production, a characteristic of this complex industrial era. More accountants than ever before are engaged in the tasks of recording, classifying, summarizing and interpreting financial data. Financial statements are the end products of an accountant's task.

For every accountant employed in the construction of a statement, there are scores of people interested in the analysis and use of such statements, particularly the balance sheet and income statements. These persons include creditors, bankers, investors,executives and the general public.

A financial statement which has been carefully prepared must be analyzed and interpreted in the same manner if worthwhile results are to be obtained. Along with the rapid growth of accounting, there has been a continual improvement in the methods used in financial statement analysis. These methods normally include the formulation of significant relationships existing between the main parts of a statement.

This writing will be concerned with the presentation and explanation of significant ratios commonly used in the analysis of the balance sheet and income statements. These ratios may be used to indicate or to infer the financial condition of a company. Emphasis will be placed on the industrial corporation. Prior to the presentation or ratios, a brief description of the general nature o! the statement to be analyzed will be given. However, there will be no attempt to analyze the statement in its entirety; only the essential component parts will be scrutinized.

It must be realized that not all types of analysis discussed herein will be applicable to each line of industry or to all financial statements. Two apparent reasons for this are: (1.) there is a great variety in financial statements, and (2.) the detailed information needed for complete analysis is not always available

Recommended Citation

Furr, Donald Eugene, "Ratio analysis of financial statements" (1957). Master's Theses . 124. https://scholarship.richmond.edu/masters-theses/124

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• September 11, 2023

Ratio Analysis of Sahara Nepal SACCOS

This proposal outlines a comprehensive study of ratio analysis of Sahara Nepal SACCOS , a reputed cooperative organization in the country. This study aims to analyze key financial ratios to assess the financial performance, profitability, liquidity and overall health of SAHARA NEPAL. By delving deeper into SAHARA NEPAL’s financial statements and performance metrics, this research will provide valuable insights and recommendations to assess the cooperative’s financial stability, efficiency and areas for improvement.

The thesis will focus on analyzing the detailed ratios of Sahara Nepal SACCOS, with the following main objectives:

• Selection of Financial Ratios: Identifying and selecting key financial ratios relevant to cooperatives, including profitability ratios, liquidity ratios, solvency ratios, and efficiency ratios.
• Financial Performance Assessment: Analysis of financial performance of SAHARA NEPAL through calculation and interpretation of key ratios. This will include an assessment of the cooperative’s profitability, growth and ability to generate returns for members.
• Liquidity Assessment: To assess the liquidity position of the SAHARA NEPAL by examining the ratios that measure the ability of the SAHARA NEPAL to meet its short-term obligations. This analysis will help determine the cooperative’s ability to handle immediate financial needs.
• Solvency Analysis: Assessment of SAHARA NEPAL’s solvency and long-term financial stability through examination of ratios that assess SAHARA NEPAL’s capital structure and ability to cover long-term debts.
• Efficiency and Productivity Assessment: An analysis of SAHARA NEPAL’s operational efficiency by calculating ratios that assess its asset management, inventory turnover, and utilization of resources.
• Comparative Analysis: Comparative analysis of SAHARA NEPAL’s ratios with industry benchmarks and historical data to understand its performance vis-à-vis other cooperatives and its own past performance.
• Trend Analysis: Studying the trend of key ratios over a particular period to identify any patterns, improvements, or concerns in SAHARA NEPAL’s financial performance.
• Recommendations: Based on the findings from the analysis, providing practical recommendations to enhance the financial performance and efficiency of the SAHARA NEPAL. These recommendations may include areas of cost reduction, capital optimization, and strategies to improve profitability.

The research is use secondary data sources including SAHARA NEPAL’s financial reports, industry data, and relevant literature. Expert interviews can be conducted with SAHARA NEPAL’s management and industry experts to gain further insights. The objective of this thesis is to present a well-structured and data-driven analysis of the financial health of Sahara Nepal SACCOS, providing valuable insights to support strategic decision-making and potential improvements in the overall financial performance of the cooperatives.

Note: This is a general outline of a proposal and thesis for the Ratio Analysis of Sahara Nepal SACCOS Actual research design and content may vary depending on the specific requirements and guidelines provided by your academic institution or supervisor.

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Astrophysics > Solar and Stellar Astrophysics

Title: photometric and spectroscopic analysis of v583 lyrae, an algol with a g-mode pulsating primary and accretion disk.

Abstract: V583 Lyr is an extremely low mass ratio Algol-type binary with an orbital period of 11.2580 days. We determined an effective temperature of T_{eff1} = 9000 \pm 350 K from newly observed spectra, which might be an underestimate due to binary mass transfer. The binary mass ratio q = 0.1 \pm 0.004 and the orbital inclination i = 85.5° are determined based on the assumption that the secondary fills its Roche lobe and rotates synchronously. The radial velocity curve is obtained from time series spectra, allowing for improved estimation of stellar masses and radii: M1 = 3.56 \pm 0.5 Msun, R1 = 2.4 \pm 0.2 Rsun; and M2 = 0.36 \pm 0.02 Msun, R2= 6.9 \pm 0.4 Rsun. The variations in the double-peaked H_{\alpha} emission indicate the formation of a stable disk during mass transfer. V583 Lyr appears to be a post-mass-reversal system, according to the estimated mass transfer using O-C period analysis. Its orbital period is slowly increasing, from which the rate of mass accretion by the primary star is estimated to be dM1/dt = 3.384 \times10^{-8} Msun/yr. The pulsation analysis was conducted on the residuals of the light curve. The primary component was found to be a g-mode pulsating star with 26 frequencies extracted lower than 9 d^{-1}. The frequency groups and rotational splitting properties of the g-mode were studied in detail. This study provides compelling evidence for an accretion disk surrounding the g-mode pulsating primary.

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