Ratio Analysis

Dividend Yield (Dividends Per Share) / (Current Share Price)

Dividend yield is a way to measure how much cash flow you are getting for each dollar invested in an equity position. In other words, it measures how much "bang for your buck" you are getting from dividends. In the absence of any capital gains, the dividend yield is effectively the return on investment for a stock.

Gross Profit Margin or Contribution Margin (Sales) / (COGS)

Indicator of how much profit is earned on your product without consideration of selling and administration costs. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations. Contribution margin is used in Break even analysis.

Cash ratio (Cash) / (Current Liabilities)

It measure the extent to which a firm can quickly liquidate assets and cover short-term liabilities. This ratio is of intense interest to a very short-term creditor. The higher the better.

Quick Ratio (Acid Test) (Current Assets - Inventory) / (Current Liabilities)

Like the current ratio, the quick ratio (also sometimes called the acid test ratio) measures a business' liquidity. However, many financial planners consider it a tougher measure than the current ratio because it excludes inventories when counting assets. It calculates a business' liquid assets in relation to its liabilities. The higher the ratio is, the higher your business' level of liquidity, which usually corresponds to its financial health. The optimal quick ratio is 1:1 or higher.

Price - Earnings (PE) Ratio (Price per Share) / (Earnings per Share)

A PE ration of 5 means that shares sell for 5 times the earnings. In essence, the price-earnings ratio indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company's earnings. This is why the P/E is sometimes referred to as the multiple because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings. In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. A low P/E can indicate either that a company may currently be undervalued or that the company is doing exceptionally well relative to its past trends. When a company has no earnings or is posting losses, in both cases P/E will be expressed as "N/A." Though it is possible to calculate a negative P/E, this is not the common convention. The price-earnings ratio can also be seen as a means of standardizing the value of one dollar of earnings throughout the stock market. In theory, by taking the median of P/E ratios over a period of several years, one could formulate something of a standardized P/E ratio, which could then be seen as a benchmark and used to indicate whether or not a stock is worth buying.

Free Cash Flow to Firm Calculated as: FCFF = Net Cash provided by operating activitites - CAPEX - Cash Dividends

A measure of financial performance that expresses the net amount of cash that is generated for the firm, consisting of expenses, taxes and changes in net working capital and investments. This is a measurement of a company's profitability after all expenses and reinvestments. It's one of the many benchmarks used to compare and analyze financial health. A positive value would indicate that the firm has cash left after expenses. A negative value, on the other hand, would indicate that the firm has not generated enough revenue to cover its costs and investment activities. In that instance, an investor should dig deeper to assess why this is happening - it could be a sign that the company may have some deeper problems.

Net working Capital to Assets (Net Working Capital) / (Total Assets)

Because net working capital is often viewed as the amount of short term liquidity a firm has, the ratio of net working capital to total assets, is a measure of liquidity. A relatively low value might indicate low levels of liquidity. This ratio is more valuable when compared to another firm or compared to yourself years ago.

Net working Capital Turnover (Sales) / (Average Net Working Capital)

Measures how much "work" we get out of our working capital. In other words it tells how much sales the business generates for each dollar of net working capital. Extremely important ratio. A high turnover ratio indicates that management is being extremely efficient in using a firm's short-term assets and liabilities to support sales. Conversely, a low ratio indicates that a business is investing in too many accounts receivable and inventory assets to support its sales, which could eventually lead to an excessive amount of bad debts and obsolete inventory. An extremely high working capital turnover ratio can indicate that a company does not have enough capital to support it sales growth; collapse of the company may be imminent. This is a particularly strong indicator when the accounts payable component of working capital is very high, since it indicates that management cannot pay its bills as they come due for payment.

Fixed Asset Turnover (Sales) / (Gross fixed asset - Accumulated depreciation)

Measures how well the business generates sales on each dollar of fixed assets. The fixed asset turnover ratio compares net sales to net fixed assets. A high ratio indicates that a business is: Doing an effective job of generating sales with a relatively small amount of fixed assets, Outsourcing work to avoid investing in fixed assets, or Selling off excess fixed asset capacity. A low ratio indicates that a business: Is over-invested in fixed assets, Needs to issue new products to revive its sales Has made a large investment in fixed assets, with a time delay before the new assets start generating revenues, or Has invested in areas that do not increase the capacity of the bottleneck operation, resulting in no additional throughput.

Net Working Capital (Current Assets) - (Current Liabilities)

Net working capital (NWC), sometimes referred to as simply working capital, is used to determine the availability of a company's liquid assets by subtracting its current liabilities. Net working capital is used in various other financial formulas that deal with cash flows. Examples of these formulas include the free cash flow to equity formula and free cash flow to firm formula.

Return on Assets (ROA) (Net Income) / (Total Assets)

Return on assets indicates the number of cents earned on each dollar of assets. Thus higher values of return on assets show that business is more profitable. This ratio should be only used to compare companies in the same industry. The reason for this is that companies in some industries are most asset-insensitive i.e. they need expensive plant and equipment to generate income compared to others. Their ROA will naturally be lower than the ROA of companies which are low asset-insensitive. An increasing trend of ROA indicates that the profitability of the company is improving. Conversely, a decreasing trend means that profitability is deteriorating. This ratio is most useful when compared with the interest rate paid on the companies debt. For example, If the ROA is 15% and the interest rate paid on its debt was 10%, then the business's profit is 5 percentage points more than it paid in interest (

Current Ratio (Current Assets) / (Current Liabilities)

The current ratio is the standard measure of any business' financial health. It will tell you whether your business is able to meets its current obligations by measuring if it has enough assets to cover its liabilities. The standard current ratio for a healthy business is 2:1, meaning it has twice as many assets as liabilities.

Interval Measure (Current Assets) / (Average Daily Operating Cost)

The number of days a firm can finance operations without additional cash income. (If nobody came in and bought anything from me today or tomorrow.. how many days can I make it?) Extremely Important and powerful ratio for small business' especially in the retail trade.

Accounts Payable Turnover (COGS) / (Accounts Payable)

The number of times trade payables turnover during the year. The higher the turnover means the shorter the time between purchase and payment. Low turnover may indicate a shortage of cash making it difficult to pay your bills. And a high turnover may mean you are not taking advantage of credit terms discounts available by your vendors.

Profitability Ratios

They measure the management's overall effectiveness in maximizing the returns generated on sales and investment. These ratios answer the question: has the business made a good profit compared to its turnover?

Free Cash Flow to Equity Calculated as: FCFE = Net Income - Net Capital Expenditure - Change in Net Working Capital + New Debt - Debt Repayment

This is a measure of how much cash can be paid to the equity shareholders of the company after all expenses, reinvestment and debt repayment. FCFE is often used by analysts in an attempt to determine the value of a company. This alternative method of valuation gained popularity as the dividend discount model's usefulness became increasingly questionable.

Cash Coverage Ratio (EBIT + Depreciation) / (Interest)

This is the ratio of EBDIT (Earnings before Depreciation, Interest, and Taxes) and Interest. This is the ability to have cash available when its time to pay the interest payment.

Receivables Turnover (Sales) / (Average Accounts Receivable)

This number indicates how quickly customers are paying your business. The greater the number of times receivables turn over during the year, the shorter the collection times between sales and cash collection. (If you give customers 30 days to pay on account, then receivables should turn over every 30 days (or 12 times per year).

Long Term Debt Ratio (Long Term Debt) / (Long Term Debt + Total Equity)

A firm's short-term debt changes constantly. In addition, accounts payable may be more of a reflection of trade practice than debt management policy. For these reasons, the long-term debt ratio, which is the ratio of long-term debt to total capitalization is frequently used by financial analysts. This ratio is preferred to the total debt ratio if the focus is on the firm's total capitalization. (Helps piece together the fundamentals of how the business is put together with owner's money and debt)

Dividends Per Share (Dividends Paid) / (Shares Outstanding)

Dividends are a form of profit distribution to the shareholder. Having a growing dividend per share can be a sign that the company's management believes that the growth can be sustained.

Debt Coverage Ratio (Net Income + Non-Cash Expenses) / (Debt)

Indicates how well your cash flow covers debt and the capacity of the business to take on additional debt. (2nd most important ratio a lender will look at). Shows how much of your cash profits are available to repay a loan. Needs to be at least 1 but the higher the better (that will say you can make the payment at least once per month).

Equity Multiplier (Total Assets) / (Total Equity)

It is a leverage ratio that is computed as the ratio of total assets to total equity. The higher the ratio the more the business is relying on debt to finance its asset base.

Sales Growth (Current Year Sales - Last Year Sales) / (Last Year Sales)

Percentage increase (or decrease) in sales between two times periods.

Book Value Per Share (Total Equity - Preferred Equity) / (Shares Outstanding)

Should the company decide to dissolve, the book value per common indicates the dollar value remaining for common shareholders after all assets are liquidated and all debtors are paid. In simple terms it would be the amount of money that a holder of a common share would get if a company were to liquidate.

COGS to Sales (Efficiency Ratio) (COGS) / (Sales)

Percentage of sales used to pay for expenses which vary directly with sales. As an efficiency measurement, the lower the cost-to-revenue ratio, the higher the operating efficiency. However, a high number of cost-to-revenue ratio does not necessarily mean low operating efficiency over time. For example, when a bank has a larger percentage of its operation in fee-based and scale-driven business, the upfront cost inputs often are higher too, resulting in a higher cost-to-revenue ratio and suggesting a lower operating efficiency at the time. But as the fee income grows over time from increased business transactions, it lowers the cost-to-revenue ratio and gradually improves the operating efficiency. (Critical in Retail Trade)

SG&A to Sales (Selling, General, Admin. Expenses) / (Sales)

Percentage of selling , general, and administrative costs to sales. (this ratio can be used for any expenses compared to sales)

Days' Sales in Receivables (Accounts Receivable) / (Total credit sales) x 365

Shows the average number of days it takes to collect your accounts receivables. A low value means that it takes a company fewer days to collect its accounts receivable. A high number shows that a company is selling its product to customers on credit and taking longer to collect money.

Days' Sales in Inventory (Inventory) / (Cost of Sales) x 365

Shows the average number of days it will take to sell your inventory (number of days sales @ cost in inventory). Management wants to make sure its inventory moves as fast as possible to minimize these costs and to increase cash flows. Remember the longer the inventory sits on the shelves, the longer the company's cash can't be used for other operations. Management strives to only buy enough inventories to sell within the next 90 days. If inventory sits longer than that, it can start costing the company extra money. It only makes sense that lower days inventory outstanding is more favorable than higher ratios.

Days' in Accounts Payable (Total supplier purchases) / (Average Accounts Payable) x 365

The accounts payable days formula measures the number of days that a company takes to pay its suppliers. If the number of days increases from one period to the next, this indicates that the company is paying its suppliers more slowly, and may be an indicator of worsening financial condition. A change in the number of payable days can also indicate altered payment terms with suppliers, though this rarely has more than a slight impact on the total number of days, since the terms must be altered for many suppliers to alter the ratio to a meaningful extent. If a company is paying its suppliers very quickly, it may mean that the suppliers are demanding fast payment terms, either because short terms are part of their business models or because they feel the company is too high a credit risk to allow longer payment terms.

Market to Book Ratio (Market Value Per Share) / (Book Value Per Share)

The book-to-market ratio attempts to identify undervalued or overvalued securities by taking the book value and dividing it by market value. In basic terms, if the ratio is above 1 then the stock is undervalued; if it is less than 1, the stock is overvalued.

Earnings Per Share (EPS) (Net Income) / Number of Shares Outstanding

The portion of a firm's profit allocated to each outstanding share of common stock. It is a performance indicator that expresses the company's net income in relation to the number of common shares outstanding. Earnings per share is also a calculation that shows how profitable a company is on a shareholder basis. So a larger company's profits per share can be compared to smaller company's profits per share. Obviously, this calculation is heavily influenced on how many shares are outstanding. Thus, a larger company will have to split its earning amongst many more shares of stock compared to a smaller company.

Return on Equity (ROE) (Net Income) / (Total Equity)

The return on equity ratio or ROE is a profitability ratio that measures the ability of a firm to generate profits from its shareholders investments in the company. In other words, the return on equity ratio shows how much profit each dollar of common stockholders' equity generates. So a return on 1 means that every dollar of common stockholders' equity generates 1 dollar of net income. This is an important measurement for potential investors because they want to see how efficiently a company will use their money to generate net income. ROE is also and indicator of how effective management is at using equity financing to fund operations and grow the company.

Market Value Ratios (Investor Ratios)

These measures are based, in part, on information not necessarily contained in financial statements - the market price per share of stock. They can only be calculated directly from publicly traded companies

Asset Utilization or Turnover Ratios (Activity Ratios)

These ratios measure how efficiently or intensively a firm uses its assets to generate sales. These ratios answer the question: how has the business used its fixed and current assets? (Other names include efficiency, and asset management ratios)

Short Term Solvency (Liquidity) Ratios

They measure the ability of a firm to convert assets into cash. These ratios are supposed to gauge the ability of a firm to pay its bills as they come due. The primary concern is the firm's ability to pay its bills over the short run without undue stress.

Long Term Solvency (Financial Leverage) Ratios

They measure the extent to which the firm has been financed by debt. They are intended to address the firm's long-run ability to meets its obligations, or more generally, its financial leverage. Failure of the firm to meet interest or sinking fund payments results in bankruptcy at the discretion of the lender.

Profit Margin (Return on Sales) (Net Income) / (Sales)

This ratio compares after tax profit to sales. Basically, it shows how much profit comes from every dollar of sales. It can help you determine if you are making enough of a return on your sales effort. Low profit margins may also reveal certain things about the industry in which a company operates or about broader economic conditions. For example, if a company's profit margin is low, it may indicate that it has lower sales than other companies in the industry (a low market share) or that the industry in which the company operates is itself suffering, perhaps because of waning consumer interest (or increasing popularity and/or availability of alternatives) or because of hard economic times or recession. Profit margin may also indicate certain things about a company's ability to manage its expenses. High expenditures relative to revenue (i.e. a low profit margin) may indicate that a company is struggling to keep its costs low, perhaps because of management problems. This is an indication that costs need to be under better control. High expenditures may occur for many reasons, including that the company has too much inventory relative to its sales, that it has too many employees, that it is operating in spaces that are too large and thus is paying too much in rent, and for many other reasons. On the other hand, a higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin can also illuminate certain aspects of a company's pricing strategy. For example, a low profit margin may indicate that a company is under-pricing​ its goods.

Debt to Equity Ratio (Total Debt) / (Total Equity)

This ratio indicates how much the company is leveraged (in debt) by comparing what is owed to what is owned. A high debt to equity ratio could indicate that a company may be over-leveraged, and should look for ways to reduce its debt. (Key ratio that is observed by lenders when making their decisions on whether to issue additional debt to a business).

Total Asset Turnover (Sales) / (Average Total Assets)

This ratio measures how efficiently a firm uses its assets to generate sales, so a higher ratio is always more favorable. Higher turnover ratios mean the company is using its assets more efficiently. Lower ratios mean that the company isn't using its assets efficiently and most likely have management or production problems. For instance, a ratio of 1 means that the net sales of a company equals the average total assets for the year. In other words, the company is generating 1 dollar of sales for every dollar invested in assets. (CRITICAL RATIO)

Times Interest Earned (Coverage Ratio) (EBIT) / (Interest Expense)

This ratio measures how well a company has its interest obligations covered with its EBIT. The lower the ratio, the higher the company's debt burden. (This can be used with any expenses (not only interest)). If you were to substitute the electric bill for example then you would measure (Earnings before utilities and taxes) / (Utilites) instead. As a rule of thumb, investors should not own a stock that has a interest coverage ratio of under 1.50 (2 or 3 is an ideal ratio). A ratio under 1 indicates the business is having difficulty generating the cash necessary to pay interest obligations.

Total Debt Ratio (Total Assets - Total Equity) / Total Assets

This ratio takes into account all debts of all maturities to all creditors. There are several definitions including the ratio of the difference between total assets and total equity to total assets. (How much of the business do you own and how much does the bank own?) The higher the ratio the greater the risk to a present or future creditor. Look for a ratio in the range of 1:1 or 4:1 (2:1 is a commonly used one for small business loans).

Inventory Turnover (COGS) / (Inventory)

This ratio tells how often a business' inventory turns over (or sell) during the course of the year. Because inventories are the least liquid form of asset, a high inventory turnover ratio is generally positive. On the other hand, and unusually high ratio compared to the average for your industry could mean a business is losing sales because of inadequate stock on hand. (Critical in retail trade).