Financial Statement Analysis

Accounting Ratios:

Profitability Ratios:

  1. Gross profit margin = Gross profit / Revenue
  2. Operating margin = Operating profit / Revenue
  3. Net profit margin = Net income / Revenue
  4. Return on assets = Net income / Average assets
  5. Return on equity = Net income / Total equity
Leverage and Solvency Ratios:
  1. Debt to EBITDA = Debt/EBITDA
    • How much debt a company has compared to how much it makes
    • Helps us understand if the company has taken on too much debt compared to what it can afford to pay back. Higher ratio = more debt, so could indicate that the company is in a dangerous situation. But if the ratio is too low, it could indicate that the company is inefficient
  2. Interest coverage ratio = EBIT / Interest expense
    • Way to see if company can easily pay the interest on loans
    • A high interest coverage ratio means you can easily pay the interest because you're earning a lot more money than what you owe in interest

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