Financial Management Formulas and Ratio Analysis
Posted on Jul 22, 2026 in Accounting and Finance
Cost-Volume-Profit (CVP) Analysis
- Contribution Margin (CM) per Unit = Selling Price − Variable Cost per Unit
- CM Ratio = (Selling Price − Variable Cost) ÷ Selling Price × 100
- Break-Even Units (BEU) = Fixed Expenses ÷ CM per Unit
- Break-Even Sales (BES) = Fixed Expenses ÷ CM Ratio
- Additional Units (AU) = Target Profit ÷ CM per Unit
- Total Units (TU) = BEU + AU
- Total Sales = TU × Selling Price
- Margin of Safety = Actual Sales − BES
Net Present Value (NPV) Analysis
- NPV = Σ (Cn × PV Factor) − Initial Investment
- Expanded Formula: NPV = [C1/(1+r)¹ + C2/(1+r)² + … + Cn/(1+r)ⁿ] − Initial Investment
- Decision Rule: NPV > 0 → ACCEPT | NPV < 0 → REJECT
Internal Rate of Return (IRR) Analysis
- Average Cash Flow = Total Cash Inflows ÷ Number of Years
- Investment Factor (I) = Initial Investment ÷ Average Cash Flow
- IRR Formula = D1 + [(C1 − I) ÷ (C1 − C2)] × (D2 − D1)
- Variables: C1 = Larger PV factor at D1 (lower rate) | C2 = Smaller PV factor at D2 (higher rate)
- Decision Rule: IRR > Cost of Capital → ACCEPT
Payback Period and Accounting Rate of Return (ARR)
- Payback Period = Years before recovery + (Remaining ÷ Year’s Cash Flow) × 12 months
- ARR = (Total Net Profit ÷ Number of Years) ÷ Initial Investment × 100
Economic Order Quantity and Working Capital
- EOQ = √(2DC ÷ H)
- Variables: D = Annual Demand | C = Cost per Order | H = Holding cost per unit per year
- Number of Orders per Year = Annual Demand ÷ EOQ
- Average Settlement Period (Payables) = (Average Trade Payables ÷ Credit Purchases) × 365
Financial Ratio Analysis Formulas
- Current Ratio = Current Assets ÷ Current Liabilities
- Quick Ratio = (Current Assets − Inventory − Prepaid Expenses) ÷ Current Liabilities
- Return on Equity (ROE) = (Profit After Tax ÷ Shareholders’ Equity) × 100
- Return on Capital Employed (ROCE) = [EBIT ÷ (Shareholders’ Equity + Long-Term Debt)] × 100
- Asset Turnover = Sales ÷ Total Assets
- Non-Current Asset Turnover = Revenue ÷ Non-Current Assets
- Inventory Turnover = Cost of Sales ÷ Average Inventory
- Inventory Days = (Average Inventory ÷ Cost of Sales) × 365
- Receivables Days = (Average Trade Receivables ÷ Credit Sales) × 365
- Payables Days = (Trade Payables ÷ Credit Purchases) × 365
- Debt-to-Equity Ratio = Long-Term Interest-Bearing Debt ÷ Shareholders’ Equity
- Earnings Per Share (EPS) = Profit After Tax ÷ Number of Shares in Issue
- Dividend per Share = Total Dividend ÷ Number of Shares
- Dividend Cover = Profit After Tax ÷ Total Dividend
| Current Assets (CA) | Non-Current Assets (NCA) | Current Liabilities (CL) | Long-Term Debt (LTD) | Shareholders’ Equity (SE) |
|---|
- Cash in hand
- Cash at bank
- Bills receivable
- Trade receivables / Debtors
- Investments (short-term)
- Stocks / Inventory (excluded from Quick Ratio)
- Prepaid expenses (excluded from Quick Ratio)
- Accrued income
- Cash recovered from doubtful debts
| - Land and Building
- Machinery / Plant & Equipment
- Furniture
- Vehicles
- Goodwill
- Patents / Trademarks
- Long-term investments
- Accumulated depreciation (subtracted from NCA)
- Preliminary expenses (fictitious — usually excluded)
| - Bank Overdraft
- Trade payables / Creditors
- Outstanding creditors
- Outstanding salaries / wages
- Outstanding expenses
- Provision for Taxation (ALWAYS CL)
- Provision for Dividend (CL if declared; write note if unclear)
- Bills payable
- Short-term loans
- Unearned revenue
| - Debentures
- Bonds
- Bank Loans (long-term)
- Term Loans / Long-term borrowings
- Public Debt (long-term)
- Mortgage loans
| - Equity Share Capital / Ordinary Share Capital
- Preference Share Capital
- Reserves
- Retained Earnings / Profit & Loss Account
- General Reserve
- Capital Reserve
- Share Premium
|
