Financial Management
Return on Stockholder's Equity
(Net Profit Margin) x (Total Asset Turnover) x (Equity Multiplier) = (EAT/Sales) x (Sales/Total Assets) x (Total Assets/Stockholder's Equity) ?
Average Collection Period
(Accounts Receivable) / (Annual Credit Sales / 365) The average collection period is the approximate amount of time that it takes for a business to receive payments owed in terms of accounts receivable.
EVA
(Return on Total Capital - Cost of Capital) x (Capital) Economic value added (EVA) is a measure of a company's financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis. EVA can also be referred to as economic profit, and it attempts to capture the true economic profit of a company. This measure was devised by Stern Stewart and Co. EVA is the incremental difference in the rate of return over a company's cost of capital. Essentially, it is used to measure the value a company generates from funds invested into it. If a company's EVA is negative, it means the company is not generating value from the funds invested into the business. Conversely, a positive EVA shows a company is producing value from the funds invested in it.
Fixed-Asset Turnover
(Sales) / (Net Fixed Assets) The fixed-asset turnover ratio is, in general, used by analysts to measure operating performance. This ratio specifically measures how able a company is to generate net sales from fixed-asset investments, namely property, plant and equipment (PP&E), net of depreciation. In a general sense, a higher fixed-asset turnover ratio indicates that a company has more effectively utilized investment in fixed assets to generate revenue.
MVA
Market Value - Capital Market value added (MVA) is a calculation that shows the difference between the market value of a company and the capital contributed by investors, both bondholders and shareholders. In other words, it is the sum of all capital claims held against the company plus the market value of debt and equity. When investors want to look under the hood to see how a company performs for its shareholders, they first look at MVA. A company's MVA is an indication of its capacity to increase shareholder value over time. A high MVA is evidence of effective management and strong operational capabilities. A low MVA can mean the value of management's actions and investments is less than the value of the capital contributed by shareholders.
Inventory Turnover
(Cost of Sales) / (Average Inventory) Inventory turnover measures how fast a company is selling inventory and is generally compared against industry averages. A low turnover implies weak sales and, therefore, excess inventory. A high ratio implies either strong sales and/or large discounts. The speed with which a company can sell inventory is a critical measure of business performance. It is also one component of the calculation for return on assets (ROA); the other component is profitability. The return a company makes on its assets is a function of how fast it sells inventory at a profit. As such, high turnover means nothing unless the company is making a profit on each sale.
Quick Ratio
(Current Assets - Inventories) / (Current Liabilities) The quick ratio is an indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. For this reason, the ratio excludes inventories from current assets. The quick ratio is more conservative than the current ratio because it excludes inventories from current assets. The ratio derives its name presumably from the fact that assets such as cash and marketable securities are quick sources of cash. Inventories generally take time to be converted into cash, and if they have to be sold quickly, the company may have to accept a lower price than book value of these inventories. As a result, they are justifiably excluded from assets that are ready sources of immediate cash.
Current Ratio
(Current Assets) / (Current Liabilities) The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations. The current ratio is mainly used to give an idea of the company's ability to pay back its liabilities (debt and accounts payable) with its assets (cash, marketable securities, inventory, accounts receivable). As such, current ratio can be used to take a rough measurement of a company's financial health. The higher the current ratio, the more capable the company is of paying its obligations, as it has a larger proportion of asset value relative to the value of its liabilities.
Payout Ratio
(Dividends Per Share) / (Earnings Per Share) Payout ratio is the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage. The payout ratio can also be expressed as dividends paid out as a proportion of cash flow. The payout ratio is a key financial metric used to determine the sustainability of a company's dividend payments. A lower payout ratio is generally preferable to a higher payout ratio, with a ratio greater than 100% indicating the company is paying out more in dividends than it makes in net income.
Net Profit Margin
(EAT) / (Sales) Net profit margin is the ratio of net profits to revenues for a company or business segment . Typically expressed as a percentage, net profit margins show how much of each dollar collected by a company as revenue translates into profit. The equation to calculate net profit margin is: net margin = net profit / revenue. Net profit margin is one of the most important indicators of a business's financial health. It can give a more accurate view of how profitable a business is than its cash flow, and by tracking increases and decreases in its net profit margin, a business can assess whether or not current practices are working. Additionally, because net profit margin is expressed as a percentage rather than a dollar amount, as net profit is, it makes it possible to compare the profitability of two or more businesses regardless of their differences in size.
Return on Stockholder's Equity
(EAT) / (Stockholder's Equity) Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
Return on Investment
(EAT) / (Total Assets) A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. ROI measures the amount of return on an investment relative to the investment's cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment, and the result is expressed as a percentage or a ratio. Given that ROI does not inherently account for the amount of time during which the investment in question is taking place, this metric can often be used in conjunction with Rate of Return, which necessarily pertains to a specified period of time, unlike ROI. One may also incorporate Net Present Value (NPV), which accounts for differences in the value of money over time due to inflation, for even more precise ROI calculations. The application of NPV when calculating rate of return is often called the Real Rate of Return.
ROI
(EAT) / (Totals Assets) = [(EAT) / (Sales)] x [(Sales) / (Total Assets)] A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. ROI measures the amount of return on an investment relative to the investment's cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment, and the result is expressed as a percentage or a ratio.
Fixed-Charge Coverage
(EBIT + Lease Payments) / (Interest + Lease Payments + Preferred Dividends Before Taxes + Before-Tax Sinking Fund) The fixed-charge coverage ratio (FCCR) measures a firm's ability to satisfy fixed charges, such as interest expense and lease expense. Since leases are a fixed charge, the calculation for determining a company's ability to cover fixed charges includes earnings before interest and taxes (EBIT), interest expense, lease expense and other fixed charges. Also referred to as the solvency ratio, the fixed-charge ratio is commonly used by lenders attempting to analyze the amount of cash flow a company has available for debt repayment. A low ratio means a drop in earnings could be dire for the company, a situation lenders try to avoid. As a result, many lenders use coverage ratios, including the times-interest-earned ratio (TIE) and the fixed-charge ratio, to determine a company's ability to take on additional debt. A company that can cover its fixed charges at a faster rate than its peers is not only more efficient, but more profitable. This is a company that wants to borrow for growth rather than hardship, which is the kind of company in which most investors are looking to invest.
Times Interest Earned
(EBIT) / (Interest Charges) TIE is a metric used to measure a company's ability to meet its debt obligations. TIE indicates how many times a company can cover its interest charges on a pretax earnings basis. Generating cash flow to make principal and interest payments and avoiding bankruptcy depends on a company's ability to produce earnings. A company's capitalization refers to the amount of money it has raised by issuing stock or debt, and choices about capitalization impact the TIE ratio. Businesses consider the cost of capital for stock and debt, and they use that cost to make decisions about capitalization.
Dividend Yield
(Expected Dividend Per Share) / (Stock Price) A financial ratio that indicates how much a company pays out in dividends each year relative to its share price. Dividend yield is represented as a percentage and can be calculated by dividing the dollar value of dividends paid in a given year per share of stock held by the dollar value of one share of stock. 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.
P / BV
(Market Price Per Share) / (Book Value Per Share) P/B Ratio is a ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. Also known as the "price-equity ratio".
P/E
(Market Price Per Share) / (Current Earnings Per Share) The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. The price-earnings ratio is also sometimes known as the price multiple or the earnings multiple. 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. Limitations: because a company's debt can affect both the prices of shares and the company's earnings, leverage can skew P/E ratios as well. For example, suppose there are two similar companies that differ primarily in the amount of debt they take on. The one with more debt will likely have a lower P/E value than the one with less debt. However, if business is good, the one with more debt stands to see higher earnings because of the risks it has taken. + Others...
Gross Profit Margin
(Sales - Cost of Sales) / (Sales) Gross profit margin is a financial metric used to assess a company's financial health and business model by revealing the proportion of money left over from revenues after accounting for the cost of goods sold (COGS). Gross profit margin, also known as gross margin, is calculated by dividing gross profit by revenues. Also known as "gross margin." There are several layers of profitability that analysts monitor to assess the performance of a company, including gross profit, operating profit and net income. Each level provides information about a company's profitability. Gross profit, the first level of profitability, tells analysts how good a company is at creating a product or providing a service compared to its competitors. Gross profit margin, calculated as gross profit divided by revenues, allows analysts to compare business models with a quantifiable metric.
Total Asset Turnover
(Sales) / (Total Assets) Asset turnover ratio is the ratio of the value of a company's sales or revenues generated relative to the value of its assets. The Asset Turnover ratio can often be used as an indicator of the efficiency with which a company is deploying its assets in generating revenue. Generally speaking, the higher the asset turnover ratio, the better the company is performing, since higher ratios imply that the company is generating more revenue per dollar of assets. Yet, this ratio can vary widely from one industry to the next. Comparisons are only meaningful when they are made for different companies within the same sector.
Equity Multiplier
(Total Assets) / (Stockholder's Equity) The equity multiplier is calculated by dividing a company's total asset value by total net equity, and it measures financial leverage. Companies finance their operations with equity or debt, so a high equity multiplier indicates that a larger portion of asset financing is attributed to debt. The equity multiplier is a variation of the debt ratio, and its definition of debt financing includes all liabilities.
Debt Ratio
(Total Debt) / (Total Assets) A financial ratio that measures the extent of a company's or consumer's leverage. It can be interpreted as the proportion of a company's assets that are financed by debt. The higher this ratio, the more leveraged the company is, implying greater financial risk. At the same time, leverage is an important tool that companies use to grow, and many businesses find sustainable uses for debt. The debt-to-equity ratio, for example, is closely related to and more common than the debt ratio, but uses total liabilities in the numerator. In the case of the debt ratio, financial data providers calculate it using only long-term and short-term debt (including current portions of long-term debt), excluding liabilities such as accounts payable, negative goodwill and "other." The debt ratio is often called the "debt-to-assets ratio."
Debt-to-Equity
(Total Debt) / (Total Equity) Debt/Equity Ratio is a debt ratio used to measure a company's financial leverage, calculated by dividing a company's total liabilities by its stockholders' equity. The D/E ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in shareholders' equity. Given that the debt/equity ratio measures a company's debt relative to the total value of its stock, it is most often used to gauge the extent to which a company is taking on debts as a means of leveraging (attempting to increase its value by using borrowed money to fund various projects). A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. Aggressive leveraging practices are often associated with high levels of risk.
