Financial Ratios & Business Performance Metrics for Analysis

Financial Ratios for Long-Term Analysis

Solvency Ratio

• Solvency: Total Assets / Total Liabilities

Asset Structure Ratios

• Fixed Assets / Total Assets: Fixed Assets (or Non-Current Assets) / Total Assets
• Current Assets / Total Assets: Current Assets / Total Assets
• Current Assets / Non-Current Assets: Current Assets / Non-Current Assets
• Working Capital / Non-Current Assets: Working Capital / Non-Current Assets

Financial Structure Ratios

• Liabilities / (Equity + Liabilities): Liabilities / (Equity + Liabilities)
• Equity / (Equity + Liabilities): Equity / (Equity + Liabilities)
• Current Liabilities / (Equity + Liabilities): Current Liabilities / (Equity + Liabilities)
• Permanent Resources / (Equity + Liabilities): Permanent Resources / (Equity + Liabilities)

Permanent Resources Structure

• Equity / Permanent Resources: Equity / Permanent Resources
• Non-Current Liabilities / Permanent Resources: Non-Current Liabilities / Permanent Resources

Fixed Assets Hedged with Own Resources

• Equity / Fixed Assets: Equity / (Property, Plant & Equipment + Intangible Assets)

Fixed Assets Hedged with Permanent Resources

• Permanent Resources / Fixed Assets: Permanent Resources / (Property, Plant & Equipment + Intangible Assets)

Economic Depreciation

• Economic Depreciation: (Annual Amortization + Depreciation) / Fixed Assets (Amortized or Depreciated)

Ageing Rate of Fixed Assets

• Ageing Rate: (Accumulated Amortization + Depreciation) / Fixed Assets (Amortized or Depreciated)

Self-Financing for Growth of the Period

• Self-Financing for Growth: Reserves Allocations / (Profit/Loss of the Year)

Total Self-Financing

• Total Self-Financing: Reserves / Equity

Reserves Growth

• Reserves Growth: Retained Earnings of the Year / Total Reserves

Self-Financing for Growth

• Self-Financing for Growth: (Retained Earnings + Amortization + Depreciation) / Increase in Fixed Assets (PPE & Intangible Assets)

Average Capitalization Capacity

• Average Capitalization Capacity: Total Reserves / Number of Years Needed to Obtain Reserves

Gearing Ratio Indebtedness

• Gearing Ratio: Liabilities / Equity

Long-Term Indebtedness

• Long-Term Indebtedness: Non-Current Liabilities / Equity

Short-Term Indebtedness

• Short-Term Indebtedness: Current Liabilities / Equity

Indebtedness Structure

• Indebtedness Structure: Non-Current Liabilities / Current Liabilities

Banking Indebtedness

• Banking Indebtedness: Banking Liabilities / Equity

Interest Coverage Ratio

• Interest Coverage: Earnings Before Interest and Taxes (EBIT) / Financial Expenses

Capacity of Debt Repayment

• Debt Repayment Capacity (EBIT): EBIT / Liabilities
• Debt Repayment Capacity (Cash Flow): Operating Cash Flows / Liabilities

Break-Even Point Analysis

Break-Even Point (BEP)

The break-even point (BEP) is where total costs (expenses) equal total revenues (incomes). At this point, a firm experiences no net profit or loss; it simply "breaks even." Graphically, it is the intersection of the total cost and total revenue curves.

BEP Formulas

• BEP in Physical Units: Fixed Costs (FC) / Contribution Margin
• BEP in Monetary Units: BEP (Physical Units) * Sales Price per Unit

Benefits of Break-Even Analysis

• Measures profit stability.
• Provides insights into operating risk.
• Aids decisions involving increased fixed costs.
• Analyzes the impact of price and cost changes on results.
• Used in management accounting for budgeting, sales monitoring, and profit analysis.

Limitations of Break-Even Analysis

• Price and units sold are often interdependent (e.g., lower prices for higher quantities).
• Variable costs are not always proportional to sales (non-linear function).
• Differentiating fixed and variable costs can be challenging.
• Increased complexity with multiple products (multi-production).
• Relies on historical data for future predictions.

Efficiency and Leverage Ratios

Efficiency Ratios

• Fixed Cost Coverage Ratio: Percentage of sales required to cover the Break-Even Point. Lower is better. If above 100%, sales are below BEP. Formula: (Sales at BEP / Total Sales) * 100
• Commercial Efficiency Ratio: Percentage of sales exceeding the Break-Even Point, representing "all profits." Formula: ((Total Sales - Sales at BEP) / Total Sales) * 100
• Variable Costs Security Ratio: Indicates how many times variable costs can be covered by profit. Formula: (Profit / Variable Costs) * 100
• Fixed Costs Security Ratio: Indicates how many times fixed costs can be covered by profit. Formula: (Profit / Fixed Costs) * 100

Leverage Ratios

• Global Leverage: Measures the relative change in profit due to a relative change in activity (sales). It indicates the extent to which a firm incurs a combination of fixed and variable costs. Formula: Operating Leverage (OL) * Financial Leverage (FL) or Contribution Margin (CM) / Earnings Before Tax (EBT)
• Operating Leverage: Measures the relative change in Earnings Before Interest and Taxes (EBIT) due to a variation in company sales. Formula: Contribution Margin (CM) / Earnings Before Interest and Taxes (EBIT)

Key Economic Performance Ratios

Asset Turnover Ratios

• Total Assets Turnover: Net Sales / Average Total Assets
• Fixed Assets Turnover: Net Sales / Average Fixed Assets (Property, Plant & Equipment - Accumulated Amortization)
• Current Assets Turnover: Net Sales / Average Current Assets

Sales Profitability Ratios

• Gross Profit Margin: (Sales - Cost of Sales) / Net Sales
• Commercial/Operating Profit Margin: EBIT / Net Sales