CMA Intermediate · Financial Management and Business Data Analytics

Financial Ratio Analysis: formula sheet

Full chapter guide

Key formulas

Ratio: Ratio = Item A ÷ Item B (shown as a pure ratio, a percentage or times); Always state the unit. Numerator and denominator must be logically related.
Horizontal analysis: absolute change: Change = Current year amount − Base (previous) year amount; A negative result is a decrease.
Horizontal analysis: percentage change: % change = (Current year − Previous year) ÷ Previous year × 100; The denominator is always the earlier year.
Vertical analysis (common size): Common size % = Item ÷ Base figure × 100; Base: total assets for balance sheet items, revenue from operations for profit and loss items.
Trend index: Trend % = Year amount ÷ Base year amount × 100; Base year equals 100. Choose a normal year as base.
Current ratio: Current ratio = Current assets ÷ Current liabilities; Written as x : 1. Current assets include inventories, debtors, bills receivable, cash, bank, marketable securities, prepaid expenses and loans and advances recoverable within a year.
Quick (liquid) ratio: Quick ratio = Quick assets ÷ Current liabilities; Quick assets = Current assets − Inventories − Prepaid expenses. Benchmark is commonly 1:1.
Absolute liquid ratio: Absolute liquid ratio = (Cash + Bank + Marketable securities) ÷ Current liabilities; Also called cash ratio. A commonly used benchmark is 0.5:1, though it varies.
Working capital: Net working capital = Current assets − Current liabilities; A rupee amount, not a ratio. Useful for finding missing figures.
Quick liabilities (variant): Quick ratio = Quick assets ÷ Quick liabilities, where Quick liabilities = Current liabilities − Bank overdraft; Use only if the question asks for it or states that overdraft is a permanent source. Otherwise use total current liabilities.
Inventory turnover ratio: Cost of goods sold ÷ Average inventory; Average inventory = (Opening + Closing) ÷ 2. If cost of goods sold is not given, some questions use sales; follow the question's data and state your basis.
Inventory holding period: 365 ÷ Inventory turnover ratio, or Average inventory ÷ COGS × 365; Answer in days.
Debtors turnover ratio: Net credit sales ÷ Average trade receivables; Include bills receivable with debtors. Use total sales only if credit sales are not separately given.
Average collection period: 365 ÷ Debtors turnover ratio, or Average debtors ÷ Credit sales × 365; Compare with the credit period allowed to customers.
Creditors turnover ratio: Net credit purchases ÷ Average trade payables; Include bills payable with creditors.
Average payment period: 365 ÷ Creditors turnover ratio, or Average creditors ÷ Credit purchases × 365; Purchases = COGS + Closing inventory − Opening inventory, when not given.
Fixed asset turnover ratio: Net sales ÷ Average net fixed assets; Net fixed assets means after depreciation.
Total asset turnover ratio: Net sales ÷ Average total assets; Use the same basis, average or closing, for all assets.
Working capital turnover ratio: Net sales ÷ Net working capital; Net working capital = Current assets − Current liabilities.
Operating cycle and cash conversion cycle: Operating cycle = Inventory days + Debtors days; Cash conversion cycle = Operating cycle − Creditors days; Add other conversion stages only if the question's cycle includes them.
Gross profit ratio: Gross profit ÷ Net sales × 100; Net sales means sales less returns. Gross profit = Net sales − Cost of goods sold.
Operating profit ratio: Operating profit ÷ Net sales × 100; Operating profit = Gross profit − Operating expenses. Exclude non-operating income and interest.
Net profit ratio: Net profit after tax ÷ Net sales × 100; Some questions ask for the ratio before tax. Read the wording.
Capital employed: Equity share capital + Preference share capital + Reserves and surplus + Long-term debt (or Total assets − Current liabilities); Both routes give the same figure if non-trade investments and fictitious assets are treated alike. Follow the question's instruction.
Return on capital employed (ROCE): EBIT ÷ Capital employed × 100; EBIT is earnings before interest and tax. Some questions use closing capital, others average capital.
Return on equity (ROE): (Net profit after tax − Preference dividend) ÷ Equity shareholders' funds × 100; Equity shareholders' funds = Equity share capital + Reserves and surplus.
Earnings per share (EPS): (Net profit after tax − Preference dividend) ÷ Number of equity shares; Use the weighted average number of shares if shares changed during the year.
Debt-equity ratio (long-term debt basis): Debt-equity ratio = Long-term debt ÷ Shareholders' equity; Long-term debt means borrowings repayable after more than a year (debentures, term loans). Equity = equity share capital + preference share capital (if treated as equity) + reserves and surplus. Use the definition given in the question.
Debt-equity ratio (total outside liabilities basis): Total outside liabilities ÷ Shareholders' equity; A wider version that includes current liabilities. Use only when the question asks for it or defines it so.
Interest coverage ratio (ICR): ICR = EBIT ÷ Interest on long-term debt (fixed interest charges); Answer in times. EBIT is profit before interest and tax. Higher means safer.
Debt service coverage ratio (DSCR): DSCR = Earnings available for debt service ÷ (Interest + Repayment of principal instalment); Earnings available for debt service is commonly PAT + depreciation + other non-cash charges + interest on term loans. Say this in your answer. Preference dividend is sometimes added to the denominator if the question says so.
Capital gearing ratio: Capital gearing = Fixed-return (fixed-cost) capital ÷ Equity shareholders' funds; Fixed-return capital = preference share capital + debentures + long-term loans. Equity funds = equity share capital + reserves and surplus. Gearing above 1 is usually treated as highly geared (fixed-return capital exceeds equity), but compare with industry norms.
Proprietary ratio (supporting): Proprietary ratio = Shareholders' funds ÷ Total assets; Shows the share of assets funded by owners. It moves opposite to the debt-equity ratio.
Earnings per share (EPS): EPS = (Net profit after tax − Preference dividend) ÷ Number of equity shares; Use the weighted average number of shares if shares changed during the year.
Price-earnings ratio: P/E = Market price per share ÷ EPS; Answer is in times. Earnings yield = EPS ÷ Market price, the inverse.
Dividend per share (DPS): DPS = Equity dividend ÷ Number of equity shares; Use only equity dividend, not preference dividend.
Dividend yield: Dividend yield = (DPS ÷ Market price per share) × 100; Measures the cash return on the price paid.
Dividend payout ratio: Payout = (DPS ÷ EPS) × 100 = (Equity dividend ÷ Earnings for equity) × 100; Retention ratio = 100% − Payout ratio.
Book value per share: Book value per share = Equity shareholders' funds ÷ Number of equity shares; Equity share capital plus reserves and surplus. Exclude preference capital.
Market-to-book value: Market-to-book = Market price per share ÷ Book value per share; Shown in times.
Three-step DuPont: ROE = Net profit margin × Asset turnover × Equity multiplier; Same as PAT ÷ Equity. Use the same basis (closing or average) for assets and equity in every part.
Net profit margin: PAT ÷ Sales × 100; Measures profitability. Sales means net sales.
Total asset turnover: Sales ÷ Total assets; Measures efficiency. Answer is in times.
Equity multiplier: Total assets ÷ Shareholders' equity; Equals 1 + (Total outside liabilities ÷ Equity). Higher value means more leverage.
Return on assets (ROA): ROA = PAT ÷ Total assets = Net profit margin × Asset turnover; ROE = ROA × Equity multiplier.
Five-step DuPont: ROE = (PAT ÷ PBT) × (PBT ÷ EBIT) × (EBIT ÷ Sales) × (Sales ÷ Total assets) × (Total assets ÷ Equity); Shows tax burden, interest burden, operating margin, turnover and leverage separately.
Gross profit and cost of goods sold: Gross profit = Sales × GP ratio; Cost of goods sold = Sales − Gross profit; Needed to find inventory and creditors when ratios use cost of goods sold.
Inventory turnover: Cost of goods sold ÷ Inventory; Use the base the question states. If it says sales, use sales.
Debtors collection period: Debtors ÷ Credit sales × Days in year; Use 360 or 365 days as the question says. State your assumption if it is silent.
Current ratio: Current assets ÷ Current liabilities; Gives current assets once current liabilities are known.
Balance sheet check: Total assets = Shareholders' funds + Long-term debt + Current liabilities; Use this to find current liabilities, and to check your finished statement.

Quick revision

Current ratio = Current assets ÷ Current liabilities.
Quick ratio = Quick assets ÷ Current liabilities, where quick assets exclude inventory and prepaid expenses.
Inventory turnover = Cost of goods sold ÷ Average inventory.
Debtors turnover = Credit sales ÷ Average debtors; collection period = days in period ÷ turnover.
Gross profit margin = Gross profit ÷ Sales × 100; net profit margin = Net profit ÷ Sales × 100.
Return on equity = Profit after tax ÷ Shareholders' equity × 100.
Debt-equity ratio = Debt ÷ Equity; check which definition of debt the question uses.
Interest coverage = EBIT ÷ Interest.
Earnings per share = Profit after tax less preference dividend ÷ Number of equity shares.
Price-earnings ratio = Market price per share ÷ EPS.
DuPont: ROE = Net profit margin × Asset turnover × Equity multiplier.
In reverse problems, begin with the item that the given ratios fix directly, such as sales from a turnover ratio.

Common mistakes

Using the current year as the denominator in percentage change Fix: Divide by the earlier (base) year amount every time.
Using total of the statement as base for profit and loss items Fix: Use revenue from operations as 100% in the statement of profit and loss.
Leaving inventories in quick assets Fix: Always write 'Quick assets = CA − Inventories − Prepaid expenses' as the first line of the quick ratio working.
Forgetting to deduct prepaid expenses Fix: Prepaid expenses cannot be converted into cash, so remove them too, unless the question defines quick assets differently.
Using total sales for debtors turnover when credit sales are given. Fix: Read the data for cash sales or credit sales, and use credit sales for debtors.
Using sales instead of cost of goods sold for inventory turnover. Fix: Inventory is at cost, so use COGS. Use sales only if COGS cannot be found, and state it.
Using net profit instead of EBIT in ROCE Fix: ROCE uses funds from all long-term providers, so use profit before interest and tax.
Including preference share capital in equity for ROE Fix: For ROE, deduct preference dividend from profit and leave preference capital out of the base.
Putting current liabilities into the debt of the debt-equity ratio when the question expects long-term debt only. Fix: Use long-term borrowings unless the question states total outside liabilities. Write your definition in the answer.
Using PAT instead of EBIT in the interest coverage ratio. Fix: PAT is after interest, so interest would be deducted twice. Use EBIT, or PBT plus interest.

Exam tips

MCQs often test the base used in vertical analysis or the denominator in percentage change. Check both before choosing.
Objectives, users and limitations are common 4-6 mark theory parts. Use numbered points with a one-line explanation.
Always show the table. Step marks are given for correct percentages even if interpretation is brief.
If a question mentions a base year, it is trend analysis. If it mentions two consecutive years, it is horizontal.
Show the list of current assets and current liabilities as a neat working note. Step marks are given for correct totals even if the final ratio is wrong.
In MCQs, check for traps: prepaid expenses, bank overdraft and whether the question asks for quick ratio or absolute liquid ratio.
Always add a one-line interpretation to written answers. Calculation alone usually does not earn full marks.
In missing-figure questions, define CL as x and express everything else in terms of x. This avoids algebra errors.