Financial
ratios are mathematical comparisons of financial statement accounts. These
relationships between the financial statement and accounts help investors,
creditors, and internal company management understand how well a business is
performing and areas of needing improvement.
Ratio
analysis is used to evaluate various aspects of a company’s operating and
financial performance such as its efficiency, liquidity, profitability and
solvency. Ratio analysis can provide an early warning of a potential
improvement or deterioration in a company’s financial situation or performance.
Investopedia
explains 'ratio analysis'- While there are numerous financial ratios, most
investors are familiar with a few key ratios, particularly the ones that are
relatively easy to calculate. Some of these ratios include the current ratio,
return on equity, the debt-equity ratio, the dividend payout ratio and the
price/earnings (P/E) ratio.
TYPES OF FINANCIAL RATIOS
In the previous articles we discussed about financial
terminologies and financial modelling. Financial ratios will help an analyst to
get a sufficient understanding of the company’s financial status.
Financial ratio Analysis is a form of Financial Statement
Analysis which is used to understand the firm's financial performance in
several key areas. Financial ratios are categorized according to the financial
aspect of the business which the ratio measures. Financial ratios allow for
comparisons between companies, industries and different time periods for one
company.
In the analysis of financial statements it is better to have
a complete understanding of the different types of ratios, their calculation,
and interpretation.
Financial ratios can be classified into five types as
follows.
1. Liquidity
ratios,
2. Profitability
ratios,
3. Leverage
ratios,
4. Solvency
ratios,
5. Asset
Management ratios or Efficiency ratios,
6. Market
prospect ratios,
7. Valuation
ratios,
Liquidity ratios
Liquidity ratios asses the firm`s ability to meet its short-
term liability using short-term assets. The short-term liability are the ones
recorded under current liabilities that come due within one financial year.
Short-term assets are the current assets.
1. Current
ratio
2. Quick
asset ratio or Acid test ratio
3. Cash
ratio
Current
Ratio
The current ratio is equal to total current assets divided
by total current liabilities. This indicates the level to which current
liabilities can be paid off through current assets. Most favorable case is 1:2.
Current Ratio=
Current Assets/ Current liability
Quick
asset Ratio or Acid test ratio
We assumes that all current assets can be converted in to
cash in order to meet short-term Liability and to assume this is never a good
idea. As firm carry some current assets which cannot be converted in cash in
short term such prepaid expenses and inventory. To fix this problem, the Quick
assets ration removes such assets from current assets.
Quick Asset Ratio =
|
Current Assets- (prepaid expenses +
Inventory)
|
Current liability
|
Cash
Ratio
The cash ratio examines the ability of the firm to settle
short-term liabilities using only cash and cash equivalents such as marketable
securities. In other words, the cash ratio indicates the extent to which
current liabilities can be paid through liquid assets only.
Cash Ratio
=
|
Cash +Marketable Securities
|
Current liability
|
Profitability Ratios
A
profitability ratio is a measure of profitability. These ratios show a
company’s overall efficiency and performance. Profitability means how
efficiently a firm make profit.
We can
divide profitability ratio in 2 types.
·
Margin
·
Returns
Margin: - It represent the firm’s
ability to convert sales into profit at various stages.
Returns: - It measure how efficiently
firm generate returns for its shareholder.
Margin ratios:-
1. Cash
Return on Capital Invested (CROCI)
2. DuPont
Formula
3. Earnings
Retention Ratio
4. Rate
of Return
5. Gross
Profit Margin
6. Net
Interest Margin
7. Net
Profit Margin
8. NOPLAT
(Net Operating Profit less Adjusted Taxes)
9. OIBDA
10. Operating
Expense Ratio
11. Overhead
Ratio
12. Profit
Analysis
13. Profitability
Index
Returns ratios:-
14. Return
on Assets (ROA)
15. Return
on Average Assets (ROAA)
16. Return
on Average Capital Employed (ROACE)
17. Return
on Average Equity (ROAE)
18. Return
on Capital Employed (ROCE)
19. Return
on Debt (ROD)
20. Return
on Equity (ROE)
21. Return
on Invested Capital (ROIC)
22. Return
on Investment (ROI)
23. Return
on Net Assets (RONA)
24. Return
on Research Capital (RORC)
25. Return
on Retained Earnings (RORE)
26. Return
on Revenue (ROR)
27. Return
on Sales (ROS)
28. Revenue
per Employee
29. Risk-Adjusted
Return
Cash
Return on Capital Invested
Cash return
on capital invested (CROCI) is metric that compares the cash generated by a
company to its equity.
It is also
sometimes known as “cash return on cash invested”. It compares the cash earned
with the money invested.
Cash Return on Capital
Invested = EBITDA / Capital Invested
DuPont
Formula
Also known
as the DuPont analysis, DuPont Model, DuPont equation or the DuPont method.
This method
is to assess the company's return on equity (ROE) breaking it’s into three
parts.
DuPont model
tells:
·
Operating efficiency, which is measured by net
profit margin;
·
Asset use efficiency, which is measured by total
asset turnover;
·
Financial leverage, which is measured by the
equity multiplier;
If ROE is
insufficient, the DuPont analysis helps to locate the part of the business that
is underperforming.
DuPont analysis= (Net
profit / revenue) X (Revenue / Total assets) X (Total assets / equity)
Earnings
Retention Ratio
Earning
Retention Ratio is also called as Plowback
Ratio. As per definition, Earning Retention Ratio or Plowback Ratio is the
ratio that measures the amount of earnings retained after dividends have been
paid out to the shareholders. The prime idea behind earnings retention ratio is
that the more the company retains the faster it has chances of growing as a
business.
This is also
known as retention rate or retention ratio.
= Plowed back gross
profits / total gross profits
= Total Gross Profits –
Payout ratio
Payout ratio
is the exact opposite of the plowback ratio, the percentage of total gross
profits paid out to shareholders/owners of the company (usually in the form of
dividends).
= (Total Net Profit /
Number of Total share) - (Dividend / Share)
The
investors prefer to have a higher retention ratio in a fast growing business,
and lower retention ratio in a slower growing business.
Rate
of Return
The rate of
return is the rate of interest on an investment annually when compounding
occurs more than once.
ROR (For Single
period) = (Vf- Vi) / Vi
ROR (For Compounded
period) = (1+R) 1/t -1
(OR)
ROR (For Compounded
period) = (1+ (i/t)) t -1
Where:-
VF
= Final Value of investment
Vi
= Invested Value
I= Annual
interest rate
t =Number
of compounding periods
Gross
Profit Margin
Gross margin
is a good indication of how profitable a company is at the most fundamental
level, how efficiently a company uses its resources, materials, and labour.
Gross profit
margin is the ratio of gross profit to sales revenue. Gross margins reveal how
much a company earns taking into consideration the costs that it incurs for
producing its products or services.
Gross margin
measures a company's manufacturing and distribution efficiency during the
production process. Investors use the gross profit margin to compare companies
in the same industry and also in different industries to determine what are the
most profitable.
Gross profit margin
= Gross profit / Revenue
(OR)
Gross profit margin
= (Revenue – COGS) / Revenue
Net
Interest Margin
The net Interest margin can be expressed as a performance
metric that examines the success of a firm’s investment decisions as contrasted
to its debt situations. A negative Net Interest Margin indicates that the firm
was unable to make an optimal decision, as interest expenses were higher than
the amount of returns produced by investments. This is a useful measure to
track the financial institution’s profitability.
Net Interest Margin =
(Investment Returns – Interest Expenses) / Average Earning Assets
Net
Profit Margin
Net profit margin (or profit margin, net margin, return on
revenue) is a ratio of profitability calculated as Profit after tax (PAT or net
profits) divided by sales (revenue). Net profit margin is displayed as a
percentage.
Net profit margin is a key ratio of profitability. It is
very useful when comparing companies in similar industries. A higher net profit
margin means that a company is more efficient at converting sales into actual
profit.
Net profit margin =
Profit after tax / Revenue
NOPLAT
(Net Operating Profit less Adjusted Taxes) or EBI (Earnings before interest)
It is a measurement of profit which includes the costs
and the tax benefits of debt financing. It is a firm’s total operating profit
where adjustments for taxes are made. It shows the profits that are generated
from the core operations of a company after making the deductions of income
taxes which are related to the company’s core operations. For discounted cash flow
models (DCF), often NOPLAT is used.
NOPLAT = Operating
Income x (1 – tax rate)
OIBDA (operating
income before depreciation and amortization)
It is a Non GAAP related measurement of finance. For a
public company, it is always better to report earnings based on OIBDA
calculation as it is always higher than any other figure. If a public company
is looking to impress the stakeholders, then it is advisable that it reports
earnings after calculating OIBDA.
OIBDA = Operating income
+ Depreciation + Amortization
Operating
Expense Ratio
The investors using this ratio can further compare any type
of expense including insurance, utilities, taxes and maintenance, to the gross
income, and the sum of all expenses to the gross income.
The main items included in the operating expense include
property management, property taxes, utilities, wages, insurance, fees,
supplies, repairs and maintenance, advertising, accounting fees and similar
more. However, the items not included in operating expenses are
personal property, loan payments, and capital improvements.
Operating Expense Ratio
= Operating Expenses / Effective Gross Income
Overhead
Ratio
Overhead ratio is the comparison of operating
expenses and the total income which is not related to the production of
goods and service. The operating expenses of a company are the expenses that incurred
by the company on a daily basis. The operating expenses include maintenance of
machinery, advertising expenses, depreciation of plant, furniture and various
other expenses.
Overhead ratio =
Operating Expenses / (Taxable net interest income + Operating income)
Profit
Analysis
In managerial economics, profit analysis is a form of cost
accounting used for elementary instruction and short run decisions. A profit
analysis widens the use of info provided by breakeven analysis. An important
part of profit analysis is the point where total revenues and total costs are
equal. At this breakeven point, the company does not experience any income or
any loss.
Profit Volume Ratio =
(Shareholders contribution / Sales) * 100
Profitability
Index
The profitability index (PI) also known as profit investment
ratio (PIR) and value investment ratio (VIR) refers to the ratio of discounted
benefits over the discounted costs. It is an evaluation of the profitability of
an investment and can be compared with the profitability of other similar
investments which are under consideration. The profitability index is also
referred to as benefit-cost ratio, cost-benefit ratio, or even capital
rationing. The profitability index is one of the numerous ways used to quantify
and measure the efficiency of a proposed investment.
Profitability index (PI)
= PV of future cash flow / Initial investment
Rules for selection or rejection of a project:
·
If PI > 1 then accept the project
·
If PI < 1 then reject the project
Return
on Assets (ROA)
Return on assets (ROA) is a financial ratio that shows
the percentage of profit that a company earns in relation to its overall
resources (total assets). Return on assets is a key profitability ratio
which measures the amount of profit made by a company per dollar of its assets.
ROA = Net Income after
tax / Total assets
Return
on Average Assets (ROAA)
Return on Average Assets (ROAA) can be defined as an
indicator used to evaluate the profitability of the assets of a firm. The
return on average assets is useful in measuring profits against the assets used
by a company for generating profits.
ROA = Net Income after
tax / Average Total assets
Return on
Average Capital Employed (ROACE)
As stated by Investopedia, the return on average capital
employed is helpful for analyzing businesses in capital-intensive industries,
oil for example. The businesses capable of squeezing higher profits from a
smaller amount of capital assets will feature a higher ROACE as compared to
those which are not efficient in transforming capital into profits.
ROACE = EBIT / (Average
Total Assets - Average Current Liabilities)
Capital Employed = Total
Assets – Current Liabilities = Equity + Non-current Liabilities
Return
on Average Equity (ROAE)
The return on average equity (ROAE) refers to the
performance of a company over a financial year. This ratio is an adjusted
version of the return of equity that measures the profitability of a company.
The return on average equity, therefore, involves the denominator being
computed as the summation of the equity value at the beginning and the closing
of a year, divided by two.
ROAE = Net Income / Avg.
Stockholders' Equity
Return
on Capital Employed (ROCE)
Return on capital employed (ROCE) is a measure of the
returns that a business is achieving from the capital employed, usually
expressed in percentage terms. Capital employed equals a company's Equity plus
Non-current liabilities (or Total Assets − Current Liabilities), in other words
all the long-term funds used by the company. ROCE indicates the efficiency and
profitability of a company's capital investments.
Return on capital
employed (ROCE)
= EBIT / Capital
Employed
(OR)
= EBIT / (Equity +
Non-current Liabilities)
(OR)
= EBIT / (Total Assets -
Current Liabilities)
Return on Debt
(ROD)
The return on debt (ROD) can be expressed as the
quantification of a company’s performance or net income as allied to the amount
of debt issued by the company. As stated by Investopedia, the return on debt is
an intricate financial modeling skill rather than being a commonly
used financial reporting factor.
Return on Debt (ROD) =
Net income / long term Debt
Return on
Equity (ROE)
Return on equity (ROE) is the amount of net income
returned as a percentage of shareholders equity. It reveals how much profit a
company earned in comparison to the total amount of shareholder equity found on
the balance sheet.
Return on
equity (ROE) = Net Income after Tax / Average Shareholder's equity
Return
on Invested Capital (ROIC)
ROIC is the capital which is return on
investment in business is a high-tech way of examining a stock at return
on investment that corrects for some specialties of Return on Assets and Return
on Equity. It is a valuable knowing that how to translate it because it’s a
better evaluation of profitability than Return on Assets and Return on Equity
as the whole. Fundamentally ROIC mends on Return on Assets and Return on Equity
because it places the liability and equity financing at a comparable footing.
It gets rid of the debt related to aberration that can make extremely leveraged
organizations look very productive when they using return On Equity.
Return on invested
capital (ROIC) = Net operating profit after tax (NOPAT) / Capital
Investment
(Or)
ROIC = (Net Income -
Dividends) / Capital Investment
Return
on Investment (ROI)
Return on investment (ROI) is performance measure used
to evaluate the efficiency of investment. It compares the magnitude and timing
of gains from investment directly to the magnitude and timing of investment
costs. It is one of most commonly used approaches for evaluating the financial
consequences of business investments, decisions, or actions.
ROI is an important financial metric for:
·
Asset purchase decisions (such as computer
systems, machinery, or service vehicles)
·
Approval and funding decisions for projects and
programs of different types (for example marketing programs, recruiting
programs, and training programs)
·
Traditional investment decisions (for example
management of stock portfolios or the use of venture capital).
Return on Investment (ROI) = (Gains from
Investment – Cost of Investment) / Cost of Investment
(OR)
Return on Investment = Net profit after
interest and tax / Total Assets
Return
on Net Assets (RONA)
The return on net assets (RONA) is a comparison of
net income with the net assets. This is a metric of financial performance of a
company that takes into account earnings of a company with regard to fixed
assets and net working capital.
The return on net assets (RONA) helps the investors to
determine the percentage net income the company is generating from the assets.
Return on Net Assets = Net Income / (Fixed
Assets + Net Working Capital)
Return
on Research Capital (RORC)
The return on research capital (RORC) is a
calculation used to assess the revenue earned by a company as an outcome of
expenditures made on research and development activities. The return on
research capital is an element of productivity and growth, as research and
development is one of the techniques employed by the companies to develop new
products and services for sale. This metric is generally used in industries
that depend largely on R&D like the pharmaceutical industry.
RORC = Current Year Gross Profit / Previous
Year R&D Expenditures
Return
on Retained Earnings (RORE)
The return on retained earnings (RORE) is a
calculation to reveal the extent to which the previous year profits were
reinvested. The return on retained earnings is expressed as a percentage ratio.
A higher return on retained earnings indicates that a company would be better
off reinvesting the business. On the contrary, a lower return on retained
earnings indicates that paying out dividends might prove to be in the company’s
best interests.
As stated by Investopedia, it can generally, as an investor,
be difficult to evaluate the worth of a company by just having a look at its
balance sheet. A return on retained earnings computation can be helpful in
assuaging some of the confusion in addition to clarifying unerringly what the
numbers are trying to say. For investors, a general rule of thumb is to look
for companies featuring a high return on retained earnings which is regularly
reinvested
To calculate return on retained
earnings, compare the total amount of profit per share retained by a
company over a given period of time against the change in profit per share over
that same time period.
Return on Retained Earnings (RORE) = Change in
profit per share for the period / Retained profit per share for the period
Return
on revenue (ROR)
The return on revenue (ROR) is a measure of
profitability that compares net income of a company to its revenue. This is a
financial tool used to measure the profitability performance of a company. Also
called net profit margin.
The return on revenue (ROR) is tool for measuring the
profitability performance of a company from year to year. This ratio compares
the net income and the revenue. An increase in ROR is means that the company is
generating higher net income with lesser expenses.
This ratio can help the management in controlling the expenses.
It can give indications of rising expenses. If a decrease in return on revenue
is observed, the management should know that the expenses are not being managed
as efficiently as in the past. The management should find out why the expenses
are rising and then take steps to reduce them. An increase in the ROR is an
indication that the expenses of the company are being facilitated efficiently.
These insights can help to see a clearer picture of the expenses and it can
help to control expenses.
Return on Revenue (ROR) = Net Income / Revenue
Return
on Sales (ROS)
Return on sales (ROS) is a ratio widely used to evaluate an
entity's operating performance. It is also known as "operating profit
margin" or "operating margin". ROS indicates how much profit an
entity makes after paying for variable costs of production such as wages, raw
materials, etc. (but before interest and tax). It is the return achieved from
standard operations and does not include unique or one off transactions. ROS is
usually expressed as a percentage of sales (revenue).
Return on sales (operating margin) = EBIT /
Revenue
Revenue
per Employee
Revenue per employee measures the amount of sales generated
by one employee. This is a measure of performance of human resources of a
company. It is an indicator of productivity of company’s personnel. It also
indicates how efficiently a company is utilizing its human resources.
Generally speaking higher the revenue per employee figure
is, the better it is. But revenue per employee will vary in different industries
according to intensity of labor. Revenue per employee is less in the industries
which are labor-intensive. On the other hand this metric is higher in the high
tech, low labor-intensive companies.
Revenue per Employee = Sales Revenue / Number
of Employees
Leverage Ratios
Any ratio used to calculate the financial leverage of a company
to get an idea of the company's methods of financing or to measure its ability
to meet financial obligations. There are several different ratios, but the main
factors looked at include debt, equity, assets and interest expenses.
Leverage ratios are for evaluating solvency and capital
structure.
1. Degree
of operating leverage – DOL
2. Degree
of financial leverage – DFL
3. Degree
of Combined leverage - DCL
4. Debt
Ratio
5. Debt
– Equity Ratio
6. Long-term
Debt to Capitalization
7. Interest
Coverage ratio
Degree
of operating leverage – DOL
The Degree
of Operating Leverage Ratio helps a company in understanding the effects of
operating leverage on the company’s probable earnings. It is also important in
determining a suitable level of operating leverage which can be used in order
to get the most out of the company’s Earnings before interest and taxes or
EBIT.
If the
operating leverage is high, then a smallest percentage change in sales can
increase the net operating income.
= % Change in EBIT / %
Change in Sales
(Or)
= Contribution / EBIT
(Or)
= Q*(P-V) / (Q*(P-V)-F)
DOL measures the sensitivity of NOI to
changes in the firm’s revenues.
Degree
of financial leverage – DFL
Financial
leverage measures the sensitivity of the firm’s net income (NI) to changes in
its net operating income (NOI). In contrast to operating leverage, which is
determined by the firm’s choice of technology (fixed and variable costs),
financial leverage is determined by the firm’s financing choices (the mix of
debt and equity).
= % Change in EPS / %
Change in EBIT
(OR)
= EBIT/EBIT- Interest
(Or)
= (Q*(P-V)-F) /
(Q*(P-V)-F-I)
Degree
of Combined leverage - DCL
Combined
leverage measures the overall sensitivity of the firm’s net income (NI) to a change
in sales. The degree of combined leverage (DCL) measures the percentage change
in net income for a given percentage change in sales:
= Percentage change in NI / Percentage change
in Sales
(Or)
= (Q*(P-V)) / (Q*(P-V)-F-I)
(Or)
=Contribution / EBIT-
Interest
Debt
Ratio
The debt
ratio indicates the proportion of assets financed through both short-term and
long-term debt.
Debt ratio= Total
liability / Total assets
Debt
– Equity Ratio
The debt to equity ratio of a company or sector informs
investors of the correlation between capital contributions from creditors and
shareholders in a manner that speaks to a company’s degree of liquidity.
Debt to equity ratio=
Long term debt / Shareholders’ Equity
Long-term
Debt to Capitalization
Long-term Debt to
Capitalization = Long-Term Debt / (Long-Term Debt + Shareholders’ Equity)
Where:-
Shareholder’s equity = Total Assets – Total liability
(Or)
Share Capital + Retained earning + Treasury Shares
Interest
Coverage ratio
The interest
converge ratio, also known as the times-interest earned. It is the ratio of
EBIT to interest charge. The ratio shows number of times the interest payment
are covered by the firm`s operating earnings. The larger the coverage the
better their ability of the firm to service interest obligations on debt.
Interest Coverage ratio=
EBIT / Interest Expenses
Solvency ratio
Solvency ratio is a key metric to find measure an
enterprise’s ability to meet its debt and other obligations.
Solvency ratio = PAT + Depreciation/Total liability (Long term
liability + Short term liability)
Lower
solvency ratio means the high probability to default on its debts obligations.
Asset Management Ratios or Efficiency ratios
Asset management ratios are the key to analyzing how
effectively and efficiency your business is managing its assets to generate sales.
Asset management ratios are also called turnover ratios or efficiency ratios.
1. Asset
Turnover Ratio
2. Capacity
Utilization Rate
3. Cash
Conversion Cycle (Operating Cycle)
4. Defensive
Interval Ratio
5. Fixed
Asset Turnover ratio
6. Inventory
Turnover ratio
7. Account
Receivable Turnover Ratio
8. Accounts
Payable Turnover Ratio
9. Working
Capital Ratio
Asset
Turnover
It is a measure of how efficiently management is using the
assets at its disposal to promote sales. The ratio helps to measure the
productivity of a company's assets.
Asset turnover = Revenue / Average total assets
Asset turnover (days) =
365 / Asset turnover
Capacity
Utilization Rate
Capacity utilization rate also helps in verifying the level at
which piece costs will rise. Capacity utilization rate is best when used for
companies that manufacture physical products instead of services, as it is easy
to quantify goods than services.
The capacity utilization
rate = (Actual Output – Potential Output) / Potential Output x 100
Cash
Conversion Cycle (Operating Cycle)
It is the
time between the purchase of inventory and the receipt of cash from accounts
receivable. It is the time required for a business to turn purchases into cash
receipts from customers. It also represents the number of days a firm's cash
remains tied up within the operations of the business.
The
cash conversion cycle is also known as the cash cycle, asset conversion cycle or net operating cycle.
Cash Conversion Cycle =
Days Inventory
Outstanding + Days sales outstanding – Days Payable Outstanding
Days inventory outstanding* = 365 / Inventory turnover
Days Payable Outstanding*= 365 /Accounts payable turnover
ratio
Days Sales Outstanding*=365 / Receivables Turnover Ratio
Defensive
Interval Ratio
Defensive Interval Ratio is an efficiency ratio that measures how many
days a company can operate without having to access non-current or long term
assets.
This ratio compares the assets to the liabilities instead of comparing
assets to expenses. Defensive Interval Ratio is a good way to find out if the
company is a good investment for you or not. Defensive Interval Ratio is also
called as Defensive Interval Period.
Defensive Interval Ratio = Current Assets /
Daily Operational Expenses (In days)
The defensive assets are all the assets that you can sell which you can
make use of whenever you need them by selling them or also the amount that is
owed to you by a defaulter. To calculate defensive interval ratio we can make use
of
Operational Expenses = Defensive assets –
Non-cash charges
Defensive Interval Ratio* = Current Assets
/ (Defensive assets – Non-cash charges)/360
Fixed
Asset Turnover
Fixed asset turnover ratio compares the sales revenue a company to its
fixed assets. This ratio tells us how effectively and efficiently a company is
using its fixed assets to generate revenues. This ratio indicates the
productivity of fixed assets in generating revenues. If a company has a high
fixed asset turnover ratio, it shows that the company is efficient at managing
its fixed assets. Fixed assets are important because they usually represent the
largest component of total assets.
There is no standard guideline about the best level of asset turnover
ratio. Therefore, it is important to compare the asset turnover ratio over the
years for the same company.
Fixed asset turnover= Sales Revenue / Total
Fixed Assets
Inventory
Turnover
Inventory turnover is a measure of the number of times inventory is sold
or used in a given time period such as one year. It is a good indicator of
inventory quality (whether the inventory is obsolete or not), efficient buying
practices, and inventory management. This ratio is important because gross
profit is earned each time inventory is turned over. Also known as stock
turnover.
Inventory turnover = Cost of goods sold /
Average Inventory
The number of days in the period can then be divided by the inventory
turnover formula to calculate the number of days it takes to sell the inventory
on hand or "Inventory turnover days":
Days inventory outstanding = 365 /
Inventory turnover
Average Inventory*= (Beginning inventory +
Ending inventory)/2
Cost of goods sold*= Beginning Inventory +
Purchases - Ending Inventory
OR
Cost of goods sold* =Average Cost per Unit
x Units Sold
Account
Receivable Turnover Ratio
The receivable turnover ratio (debtor’s turnover ratio, accounts
receivable turnover ratio).
This ratio determines how quickly a company collects outstanding cash balances
from its customers during an accounting period. It is an important indicator of
a company's financial and operational performance and can be used to determine
if a company is having difficulties collecting sales made on credit.
Receivable turnover ratio indicates how many times, on average, account
receivables are collected during a year.
Account Receivables turnover ratio = Net credit sales / Average accounts
receivables
Accounts Receivable outstanding or Average collection period in
days:
Average collection period = 365 /
Receivables Turnover Ratio
(OR)
(Days X Average amount of accounts
receivables)/credit sales
Accounts
Payable Turnover Ratio
It is an accounting liquidity metric that evaluates how fast a
company pays off its suppliers. An accounts payable turnover ratio measures the
number of times a company pays its suppliers during a specific accounting
period.
Accounts payable
turnover ratio = Total purchases / Average accounts payable
Days Payable Outstanding
= 365 /Accounts payable turnover ratio
Total Purchases* = Cost
of sales + Ending inventory – Starting inventory
Working
Capital Ratio
The working capital ratio, also called the current ratio, is a
liquidity ratio that measures a firm's ability to pay off its current
liabilities with current assets. The working capital ratio is important to
creditors because it shows the liquidity of the company.
Working capital ratio=
Current Assets / Current liability
Valuation Ratios
As an investor it is vital that you find a stock at a good
entry point. The best way to help you find a good entry point is to do
some fundamental analysis and try to figure out what an appropriate
valuation for the stock is. In order to incorporate valuation into a stock
strategy you must first understand how to go about valuing a stock.
A valuation ratio is a measure of how cheap or expensive a
security or business is, compared to some measure of profit or value. A
valuation ratio is calculated by dividing a measure of price by a measure of
value, or vice-versa. The point of a valuation ratio is to compare the cost of
a security (or a company, or a business) to the benefits of owning it.
Price/ Sales
Ratio
P/S is a
common-sense ratio: The lower the better, although there's no specific rule or
normalizing factor like growth. Somewhere around 1.0 is usually considered
good.
Price to Sales
Ratio = Stock Price per share / Sales per share
Price/ Book Value Ratio (P/BV Ratio)
Price / Book Value is also a regularly reported and watched
valuation ratio. It indicates the market price of a share in terms of the book
value of equity. It is the rupee amount an investor has to pay for each rupee
of book value.
Price to Book Ratio (P/BV Ratio) = Stock Price
per share / Book Value per Shares
Book Value per share*= Equity/Number of share
Price/ Earnings
Ratio (P/E ratio)
This is the most widely used valuation ratio. It indicates
the market price of a share in terms of earnings. It is the rupee amount an
investor has to pay for each rupee of earnings made by the firm for the
ordinary shareholder.
Price to Earnings
Ratio (P/E ratio) = Stock Price per share / Earnings per share (EPS)
EPS*= Net
Income/Number of Shares
Price/
earnings growth ratio
When comparing businesses, one popular way to
"normalize" P/Es is to compare them to their respective company's
growth rate. From this comparison, get to know another derivative of P/E,
price/earnings to growth, or PEG.
Price to earnings
growth ratio = Price/ Earnings
Ratio / Annual EPS growth rate
Price/
cash flow Ration (P/CF Ratio)
The price/cash flow indicates the price of a share in terms
of the cash flow per share. It shows the rupee amount an investor has to pay
for each rupee of cash flow generated.
Price/ cash flow ratio = stock price per share/ Cash flow per share
Cash flow*=Total cash flow/ Number of
shares
Total cash flow* = Net income +
Depreciation & Amortization
Equity
Ratio
The equity ratio is an
investment leverage or solvency ratio that measures the amount of assets that
are financed by owners' investments by comparing the total equity in the
company to the total assets.
Equity ratio= Total Equity / Total
Assets
Higher
equity ratios are typically favorable for companies
Dividend
Yield
The dividend yield indicates the
dividend income as a percentage of the investment. It is calculated as the
common dividend per share dividend by the market price per share.
Dividend Yield = Dividend per share /
Share price
Dividend per share (DPS)*= Total
Dividend/ Number of Shares
Dividend
Payout Ratio
The dividend payout ratio
measures the percentage of net income that is distributed to shareholders in
the form of dividends during the year. In other words, this ratio shows the
portion of profits the company decides to keep to fund operations and the
portion of profits that is given to its shareholders.
Dividend payout ratio = Total
dividend / Net Income
Debt
ratio
Debt ratio is a solvency
ratio that measures a firm's total liabilities as a percentage of its total
assets. In a sense, the debt ratio shows a company's ability to pay off its
liabilities with its assets. In other words, this shows how many assets the
company must sell in order to pay off all of its liabilities.
Debt ratio = Total Liability/ Total
Assets
Enterprise
multiple
The
main advantage of enterprise multiple over the PE ratio is that it is
unaffected by a company's capital structure, in accordance with capital
structure irrelevance. It compares the value of a business, free of debt, to
earnings before interest. A low ratio indicates
that a company might be undervalued.
Enterprise multiple = EV / EBITDA
EV/sales
Ratio
=Enterprise Value / Net Sales
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