Financial Ratios

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)} = (V_f- V_i) / V_i

ROR _{(For Compounded period)} = (1+R) ^1/t -1

(OR)

ROR _{(For Compounded period)} = (1+ (i/t)) ^t -1

Where:-

V_F = Final Value of investment

V_i = 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

  

Reference:-

·         www.wikipedia.com

·         www.Investopedia.com

·         www.readyratios.com