Friday, 10 December 2021

Ratio analysis for financial position of Project

An analysis of an project's financial position and operating results through the ratio calculation of the relevant indicators in the financial statements to understand the analysis of the Project's development prospects.


It is the most basic tool of financial analysis to compare the relevant data of several important items in the same financial statements and find out the ratio to analyze and evaluate the Project's Project activities and the Project's historical situation. 


Because the purpose of financial analysis is different, various analysts, including creditors, management, government agencies, etc., 

Have adopted different emphasis. as a stock investor, we mainly grasp and apply four types of ratios, that is, they reflect the four major financial ratios of the Project's profitability ratio, solvency ratio, growth capacity ratio and working capacity ratio.

The type of ratio

A commonly used analysis of a Project's profitability ratio


Return on assets

Also known as investment profitability. refers to the net profit that can be obtained from an average of 100 yuan of the Project's total assets, the formula is that the net profit before tax / the total average assets × 100%. among them, net profit before tax, net profit, interest expense, income tax, and the average total assets are (total assets at the beginning of the period and total assets at the end of the period) /2.

The return on assets is an indicator of the Project's operational effectiveness in using all its investment resources. the higher the ratio, the better the Project's use of assets, on the contrary, the use of assets is poor.

Since the source of assets includes other creditors besides shareholders, such as banks and investors in corporate bonds, interest expenses to creditors should be included in addition to after-tax profits attributable to shareholders. adjusted return on assets is: return on assets ( after-tax profits and interest expenses) / 100% × total assets.

Return on capital

That is, the ratio of net income to shareholders' equity, after-tax profit to total capital. the formula is: capital return rate , after-tax profit (net income)/total capital (shareholders' equity) × 100%. the rate of return on capital is an indicator of the effectiveness of a Project's operations by using all its capital. "the higher the ratio, the more efficient the use of capital, whereas capital is underutilized."

In the stock market, one of the conditions for a public listing is that the Project's return on capital must reach a certain ratio in recent years. for example, the Taiwan stock exchange stipulates that a Project with a capital return of less than 6% may not list its shares, a Project with a capital return ratio of between 6% and 8% may only be listed as a class ii listed stock, and only a Project with a capital return of more than 8% may be allowed to be listed as a class i listed stock.

Return on equity

The formula is: the return on equity is 100% of the return on equity × after tax, and the ability of the Project to distribute dividends can be observed.

"when this ratio is high, the Project's dividend distribution is naturally high, whereas the ratio is low, and if retained earnings are not used, the dividend allocated is naturally low."

Return on shareholders' equity

Also known as net return. "investors of common stock entrust the Project's management with the return on investment that can be obtained by applying their funds."

The formula is: "shareholder's return on equity" (after-tax profit - preferred dividend) / shareholders' equity × 100%. this ratio measures the return on common equity, and is therefore of the greatest concern to equity investors. this ratio can also be used to measure the size of a Project's product profits and sales revenue, the higher the ratio, indicating that the greater the profit, and vice versa.

Dividend yield

That is, the ratio of dividends to share prices. it represents the actual profitability that a Project's shareholders can actually earn at market prices. the formula is: dividend payoff rate - dividend per share / ×100% per stock market price.

Book value per share

That is, the ratio of total shareholders' equity to total share issues. the formula is: book value per share , total shareholders' equity / (number of preferred shares and number of common shares). 


Comparing the book value per share with the par value per share shows how good the operating situation is. "in general, a well-run and financially sound Project must have a book value of more per share than the face value of each share, and an increase in book value year by year indicates that the firm's capital structure is becoming more and more sound." "of course, the book value per share is only the value of the shares invested by the shareholders of the Project, not the value of the shares that the shareholders can withdraw from the Project."
earnings per share

The formula is as follows: earnings per share (after-tax earnings - preferred dividends) / number of common share issues. through the analysis of earnings per share, investors can not only understand the profitability of the Project, but also predict dividends per share and dividend growth rate, and determine the value of each common stock accordingly.

Price-to-profit ratio

Short for profit ratio. the formula is as follows: price earnings ratio s stock price/earnings per share. by analyzing this ratio, investors can predict the future growth of the Project's earnings and find the price of the stock.

Profit margin on common stock

The formula is as follows: the profit margin of common stock is 100% of the book value per common share/ × the price of common stock per stock market. this ratio is an important parameter for investors when comparing investment opportunities. the higher the profit margin per share, the better the quality of the Project's stock, the higher the profitability, the greater the attractiveness to investors.

Price yield

For the inverse of the common stock profit margin. the formula is as follows: price-to-return (p/p) book value per common share. the smaller the ratio, the greater the profitability of the Project, the better the quality of the stock.

Dividend distribution rate

Also known as the dividend payout rate, the formula is as follows: dividend distribution rate ( cash dividend - preferred stock dividend) / (after-tax profit - preferred stock dividend).

Sales margin

Refers to the average sales profit per 100 yuan of a Project's sales revenue. the formula is: sales profit margin - after-tax profit / sales revenue × 100%. the high or low rate means that the Project's profitability is strong or weak.

Project ratio

The formula is the operating ratio, operating costs, sales revenue, sales costs, operating expenses, or sales revenue × 100%. "analysis of this ratio shows the firm's operational effectiveness, as the difference between the operating ratio and 100 per cent is the profit or loss that occurs at the time of operation." "if a firm's ratio exceeds 100 per cent, the loss is shown, whereas the smaller the ratio, the higher the firm's net profit and profitability."


The Project's solvency includes short-term solvency and long-term solvency. reflecting short-term solvency, the ratio of a Project's assets to cash to pay off short-term debt is mainly the current ratio, the quick ratio, and the current asset composition ratio. reflects long-term solvency, i.e. the ratio of the Project's ability to repay long-term debt mainly includes shareholders' equity to liability ratio, debt ratio, debt management ratio, property rights ratio, fixed assets to long-term liability ratio, etc.

Liquidity ratio

Also known as working capital ratio, it is the most common measure of a Project's short-term solvency. the formula is as follows: current ratio - current assets/current liabilities. "the higher the ratio, the stronger the Project's short-term solvency and the sufficient working capital of the Project, whereas the short-term solvency of the firm is not strong and the working capital is inadequate.


" Generally sound financial companies, their current assets should be much higher than the current liabilities, at least not less than 1:1, generally considered to be greater than 2:1 is more appropriate.
however, for companies and shareholders, it is not that the higher the ratio, the better.

A large liquidity ratio does not necessarily indicate a sound financial position, especially if the current ratio is too large due to excessive accounts receivable and inventory balances, which is not conducive to financial soundness and is generally considered to be more than 5 to 1, which means that the Project's assets are underutilized.

Combining liquidity ratios with working capital can help to observe a Project's future solvency.

The quick ratio

Also known as the acid test ratio, it is a measure of a Project's ability to liquidate due. the formula is: quick ratio - quick assets / current liabilities. 


The meaning of quick assets is described in the difference analysis method. by analyzing the quick ratio, investors can measure the Project's ability to obtain cash to pay off short-term debt in a very short period of time. it is generally believed that the minimum speed ratio is 0.5:1, and if it is maintained at 1:1, the safety of current liabilities is more secure. this is because when the ratio reaches 1:1, even if the Project's capital turnover is difficult, it will not affect the immediate solvency.

The ratio of current assets to composition

The formula is: current assets composition ratio - total current assets/ total current assets. the purpose of this ratio is to understand the amount of investment available for each current asset: to make up for the shortfall in the current ratio and to detect the composition of current assets.

the above three ratios mainly relate to the Project's short-term solvency. the following ratios relate mainly to long-term solvency. the strength of the Project's long-term solvency is not only related to the safety of investors, but also related to the strength of the Project's ability to expand its operations.

Shareholders' equity-to-liability ratio


The formula is: shareholders' equity to liabilities ratio , the total shareholders' equity / liabilities × 100%. this ratio represents how much of a Project's own capital is offset for every $100 of its liabilities, i.e. its own capital as a percentage of its liabilities. 

"The higher the ratio, the stronger the Project's own capital, the smaller the total liabilities, and the more secure the creditor's claims, the more heavily indebted the Project is, the more financially likely it is to be in crisis and may not be able to repay its debts."

Debt ratio

This ratio is the inverse of the above ratio, which shows how much debt the Project absorbs for every $1 of capital, which is essentially the same as the above ratio, i.e. the ratio of shareholders' equity to liabilities. the formula is: the debt ratio , total liabilities / shareholders' equity. 


"Analyzing this ratio, we can measure the size of the firm's long-term solvency, as liability is a fixed liability that should be paid on time regardless of the Project's profit or loss and must be repaid at maturity." the maximum debt ratio is generally considered to be 3:1. 


"however, it must be made clear that a low debt ratio is not necessarily beneficial to investors, as the Project's own capital is sufficient to protect the Project's creditworthiness relative to its liabilities." this low ratio indicates that the Project's ability to borrow needs to be strengthened.

Borrowing ratio

This ratio indicates the amount of the creditor's total assets in the Project and is calculated as follows: The debt-to-operation ratio is 100% of the total liabilities/net total assets ×. 


In the above formula, the total liability is the creditor's equity, and the total net assets are the net amount of the total assets less accumulated depreciation. For example, Project A's liabilities are $15 million, net total assets of $22 million, and its debt-to-debt ratio is 68.18%, or 68.8% of its $100 assets. 18 yuan was obtained through debt.

This ratio can be used to measure the size of a Project's ability to expand its operations and to analyze the extent to which shareholders' equity is used. the higher the ratio, the greater the Project's ability to expand its operations, and the fuller the shareholders' equity. 


However, debt management has to bear certain risks. "if the Project goes well, the Project with this high ratio, while taking on greater risk, has the opportunity to make a greater profit and generate more returns for shareholders; it can be seen that when a Project makes a decision on borrowing operations, it must weigh the pros and cons between the increase in expected profits and the increase in risk, and should be transferred to market conditions and the smoothness of its operations. in japan, the rate generally stands at more than 80 per cent.

The ratio of property rights

That is, the own capital ratio. the formula is: the equity ratio - shareholders' equity / net assets × 100%. this ratio indicates that the share of shareholders' equity in total assets is a ratio that matches the debt-to-debt ratio. the higher the property rights ratio, the greater the proportion of the Project's own capital to total assets, so that the more key its asset structure, the stronger the long-term solvency. it is generally believed that the equity ratio (own capital ratio) must reach more than 25%, the Project's financial is the key.

Fixed asset ratio

It is calculated as: fixed ratio , shareholders' equity / fixed assets × 100%. this ratio indicates how much of a Project's fixed assets are purchased with its own capital and is used to detect whether the Project's fixed assets are overextended and inflated.


 "the higher the ratio, the better the firm's financial structure." it is generally believed that it should be at least 100 per cent higher. "if the ratio is less than 100 per cent, the firm is either under capitalised or its fixed assets are over-inflated.


" the excessive expansion of fixed assets will inevitably reduce the liquidity of assets, thus affecting future solvency.

Fixed asset-to-long-term liability ratio

The formula is: Fixed assets to long-term liabilities ratio - fixed assets / long-term liabilities × 100%. This ratio can indicate both how many fixed assets a Project has to secure for long-term borrowing and the extent to which long-term creditors' equity is secured. 


As far as companies are concerned, fixed assets, especially those that have been secured as collateral, should be maintained in proportion to long-term liabilities as a guarantee of debt security. It is generally believed that this ratio should be at least 100 per cent, and the larger theier it is, the better it will protect the interests of long-term creditors. 


Otherwise, it indicates that the Project's financial situation is not sound, and also indicates that the Project's property mortgage has reached the maximum, must find another financing channel. In the case of Project A, for example, its fixed assets were $6.6 million and its long-term liabilities were $6.5 million, compared with 101.5 per cent.

Interest protection multiple

The formula is: Interest Protection Multiplier (Interest Expenses plus Pre-Tax Profits)/Interest Expenses This ratio can be used to test the Project's ability to pay interest. The higher the interest protection multiple, the more secure the interest that creditors can receive per period; In the case of Project A, the interest charge is 9. 20,000 yuan, pre-tax profit of 1 million yuan, according to the above calculation, you can know that the Project's interest protection multiple of 11. 87 times.

Ability to grow

Growth ratios can be used to measure a Project's ability to expand its operations. the above solvency ratio can also be used in a sense to measure the Project's ability to expand its operations. 


Because security is the basis of profitability, growth, the Project's solvency ratio indicators are reasonable, the financial structure is sound, it is possible to expand operations, otherwise, if the solvency is weak, it is difficult to imagine that the Project has the strength to expand operations. 


As for the debt-to-Project ratio, fixed asset-to-long-term liability ratio, it is also an external growth ratio indicator of the Project. the Project's high debt ratio also shows, on the one hand, high reputation, creditors are willing to invest in it, the Project by borrowing more funds to expand its operations. "if fixed assets have a high ratio to long-term liabilities, it also indicates that they have the strength to borrow more long-term debt to expand their operations."


The ratios that reflect the Project's internalize to expand its ability to operate are:

Profit retention

The formula is: profit retention ratio (after tax profit - dividend payable) / profit after tax
this ratio indicates how much of a Project's after-tax profits (profits) are used to pay dividends and how much is used to retain earnings and expand operations. the higher the ratio, the more emphasis the Project attaches to the strength of development, not because of the distribution of excessive dividends and affect the Project's future development;

Reinvestment rate

Also known as the internal growth ratio. the formula is as follows: (profit after tax/shareholder's equity) × (shareholder's profit - dividend payment) / shareholder's profit) - capital return rate × shareholder's earnings retention rate.

This ratio indicates the ability of a Project to reinvest the proceeds of its surplus to support its growth. the shareholder earnings retention rate in the formula is the ratio of the difference between the dividend payment of the shareholder's profit and the shareholder's profit. shareholder earnings refer to the product of earnings per share and the number of common shares issued, which is in fact the net income of common stock.

"The higher the ratio, the stronger the firm's ability to expand its operations; In the case of Project A, the capital return ratio was 9.14 per cent and the shareholder earnings retention rate was 98.66 per cent, while the reinvestment rate was 9.01 per cent.

Turnover capacity

The turnover ratio (also known as the activity capacity ratio) is an indicator of a Project's operating effects, usually in sales revenue or cost of sales, and the denominator is made up of an asset account.

Accounts receivable turnover

It is calculated as the accounts receivable turnover rate of sales revenue/ (opening accounts receivable and accounts receivable at the end of the period) ×2 - sales revenue / average accounts receivable. 


"since accounts receivable refers to sales revenue that has not been received in cash, this ratio is used to measure whether the amount receivables of the Project are reasonable and efficient to receive." 


This ratio represents the number of turnovers receivable per year. if the number of days of the year, i.e. 365 days divided by the turnover rate of accounts receivable, the number of days it takes for accounts receivable to be transferred once a week, i.e. the average time it takes for accounts receivable to be converted to cash. 


The algorithm is: the average time required for accounts receivable to realize the average amount of time , the higher the annual turnover rate of accounts receivable, the shorter the number of days required to transfer once a week, indicating that the faster the Project collects accounts, the smaller the accounts receivable contain old accounts and priceless accounts. 


Conversely, the small turnover rate and the length of the days required to transfer once a week indicate that the realization of Project accounts receivable is too slow and that accounts receivable are not managed efficiently.

Inventory turnover

The formula is: inventory turnover rate , cost of sale / (opening inventory , closing inventory) ×2 , cost of sales / average inventory of goods.

"The purpose of inventory is to sell and realize profits, so a reasonable ratio must be maintained between the Project's inventory and the sale." inventory turnover is a measure of a Project's ability to sell goods and whether inventory is too large or short. "the higher the ratio, the faster the inventory turnover and the firm's ability to control inventory, the greater the profit margin and the smaller the amount of working capital invested in inventory." conversely, it indicates that there is too much inventory, which not only causes the capital backlog, affects the liquidity of the assets, but also increases the storage costs and product wear and tear, ingest.

Fixed asset turnover

The formula is: Fixed asset turnover : sales revenue/average fixed asset amount. This ratio represents the number of turnovers of fixed assets throughout the year to measure the efficiency of the use of fixed assets in a Project. 


The higher the ratio, the faster the turnover of fixed assets, the less idle fixed assets are; Of course, this ratio is not the higher the better, too high means that the fixed assets over-investment, will shorten the life of fixed assets. According to the formula, we can find out the fixed asset turnover rate of Project A, i.e. 780/660 x 1.18 (times)

Capital turnover

Also known as net turnover. The formula is: Capital Turnover Rate - Average amount of sales revenue/ shareholders' equity. Using this ratio, it is possible to analyze whether the capital invested by shareholders is fully utilized relative to the turnover of sales. The higher the ratio, the faster the capital turnover and the higher the efficiency of its use. 


But if the ratio is too high, the Project is too dependent on borrowing, that is, it has less capital of its own. "The lower the capital turnover, the less efficient the firm's capital use." "In the case of Project A, the capital turnover ratio can be calculated as 780/700 x 1.11 (secondary)

Asset turnover

The formula is as follows: asset turnover - sales revenue / total assets this ratio is a measure of whether a Project's total assets are fully utilized.

The speed of total asset turnover means that total asset utilization efficiency is low. [2]


In financial analysis, ratio analysis is the most useful, but also has limitations, highlighted in: ratio analysis is static analysis, for predicting the future is not absolutely reasonable and reliable. the data used in the ratio analysis is book value and it is difficult to reflect the impact of price levels. it can be seen that when using ratio analysis,

First, we should pay attention to the organic link between the various ratios for a comprehensive analysis, can not look at one or the other ratios alone, otherwise it will be difficult to accurately judge the overall situation of the Project;

Second, we should pay attention to review the nature and actual situation of the Project, not just focus on the financial statements;


Third, we should pay attention to the combination of difference analysis, so that the Project's history, current situation and the future have a detailed analysis, understanding, to achieve the purpose of financial analysis.

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