FINM6221 LU2 Ratios - Cheat Sheet
Solvency Ratios
1. Solvency ratio:
Total assets: total liabilities (TA/TL)
x: 1
= Measures the ability of the entity to settle all its liabilities - indicates whether the entity has
enough to settle all its liabilities
If assets > liabilities = business is solvent
- Solvent = will be able to solve debt problems
If liabilities > assets = business is insolvent
- Insolvent = will not be able to solve debt problems
Profitability Ratios – measure business’s profitability
1. Gross profit percentage:
(Gross profit / total sales) x 100 = x%
= Measures the company’s ability to generate profit / financial health of the company.
This is done by determining the % of profits left after deducting cost of sales from total sales.
2. Net profit percentage:
(Net profit / Total sales) x 100 = x%
= measures how efficiently a company manages its costs to generate profits. Net profits is
the amount left after COS, expenses, interest and tax are subtracted from sales
3. Return on average owner’s equity:
(Net profit / average owner’s equity) x 100 = x%
= measure the net income/ profit returned as a % of shareholders’ equity
Average shareholder’s equity = (shareholders’ equity at beginning of period + shareholders’
equity at end of period) / 2
Solvency Ratios
1. Solvency ratio:
Total assets: total liabilities (TA/TL)
x: 1
= Measures the ability of the entity to settle all its liabilities - indicates whether the entity has
enough to settle all its liabilities
If assets > liabilities = business is solvent
- Solvent = will be able to solve debt problems
If liabilities > assets = business is insolvent
- Insolvent = will not be able to solve debt problems
Profitability Ratios – measure business’s profitability
1. Gross profit percentage:
(Gross profit / total sales) x 100 = x%
= Measures the company’s ability to generate profit / financial health of the company.
This is done by determining the % of profits left after deducting cost of sales from total sales.
2. Net profit percentage:
(Net profit / Total sales) x 100 = x%
= measures how efficiently a company manages its costs to generate profits. Net profits is
the amount left after COS, expenses, interest and tax are subtracted from sales
3. Return on average owner’s equity:
(Net profit / average owner’s equity) x 100 = x%
= measure the net income/ profit returned as a % of shareholders’ equity
Average shareholder’s equity = (shareholders’ equity at beginning of period + shareholders’
equity at end of period) / 2
