Ratio Analysis

debt to assets (mkt value)

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debt to equity (mkt value)

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times interest earned

1. A company's TIE indicates its ability to pay its debts. 2. A better TIE number means a company has enough cash after paying its debts to continue to invest in the business. 3. The formula for TIE is calculated as earnings before interest and taxes divided by total interest payable on debt.

operating margin

A company's operating margin, also known as return on sales, is a good indicator of how well it is being managed and how risky it is

payables period

1. Days payable outstanding (DPO) is a financial ratio that indicates the average time (in days) that a company takes to pay its bills and invoices. 2. Companies having high DPO can use the available cash for short-term investments and to increase their working capital and free cash flow. 3. However, higher values of DPO, though desirable, may not always be a positive for the business.

inventory days on hand

1. Days sales of inventory (DSI) is the average number of days it takes for a firm to sell off inventory. 2. DSI is a metric that analysts use to determine the efficiency of sales. 3. A high DSI can indicate that a firm is not properly managing its inventory or that it has inventory that is difficult to sell.

days sales in cash

1. Days sales outstanding (DSO) is a measure of the average number of days that it takes a company to collect payment after a sale has been made. 2. DSO indicates the number of sales a company has made during a specific time period; how quickly customers are paying; if the company's collections department is working well; if the company is maintaining customer satisfaction, or if credit is being given to customers that are not creditworthy. 3. Generally speaking, a DSO under 45 days is considered low; however, what qualifies as a high or low DSO may often vary depending on business type and structure.

earnings per share (eps)

1. Earnings per share (EPS) is a company's net profit divided by the number of common shares it has outstanding. 2. EPS indicates how much money a company makes for each share of its stock and is a widely used metric for corporate profits. 3. A higher EPS indicates more value because investors will pay more for a company with higher profits. 4. EPS can be arrived at in several forms, such as excluding extraordinary items or discontinued operations, or on a diluted basis.

inventory turnover

1. Inventory turnover shows how many times a company has sold and replaced inventory during a given period. 2. This helps businesses make better decisions on pricing, manufacturing, marketing, and purchasing new inventory. 3. A low turnover implies weak sales and possibly excess inventory, while a high ratio implies either strong sales or insufficient inventory.

profit margin

1. Profit margin gauges the degree to which a company or a business activity makes money, essentially by dividing income by revenues.

return on invested capital

1. ROIC is the amount of return a company makes above the average cost it pays for its debt and equity capital. 2. The return on invested capital can be used as a benchmark to calculate the value of other companies 3. A company is creating value if its ROIC exceeds 2% and destroying value if less than 2%.

return on assets

1. Return on Assets (ROA) is an indicator of how well a company utilizes its assets, by determining how profitable a company is relative to its total assets. 2. ROA is best used when comparing similar companies or comparing a company to its previous performance. 3. ROA takes into account a company's debt, unlike other metrics, such as Return on Equity (ROE).

return on equity

1. Return on equity measures how effectively management is using a company's assets to create profits. 2. Whether an ROE is considered satisfactory will depend on what is normal for the industry or company peers. 3. As a shortcut, investors can consider an ROE near the long-term average of the S&P 500 (14%) as an acceptable ratio and anything less than 10% as poor.

dupont model return on equity

1. The DuPont analysis is a framework for analyzing fundamental performance originally popularized by the DuPont Corporation. 2. DuPont analysis is a useful technique used to decompose the different drivers of return on equity (ROE). 3. An investor can use analysis like this to compare the operational efficiency of two similar firms. Managers can use DuPont analysis to identify strengths or weaknesses that should be addressed.

accounts recievable turnover

1. The accounts receivable turnover ratio is an accounting measure used to quantify a company's effectiveness in collecting its receivables or money owed by clients. 2. A high receivables turnover ratio can indicate that a company's collection of accounts receivable is efficient and that the company has a high proportion of quality customers that pay their debts quickly. 3. A low receivables turnover ratio might be due to a company having a poor collection process, bad credit policies, or customers that are not financially viable or creditworthy. 4. A company's receivables turnover ratio should be monitored and tracked to determine if a trend or pattern is developing over time.

acid test

1. The acid-test, or quick ratio, compares a company's most short-term assets to its most short-term liabilities to see if a company has enough cash to pay its immediate liabilities, such as short-term debt. 2. The acid-test ratio disregards current assets that are difficult to liquidate quickly such as inventory. 3. The acid-test ratio may not give a reliable picture of a firm's financial condition if the company has accounts receivable that take longer than usual to collect or current liabilities that are due but have no immediate payment needed.

assets to equity (leverage)

1. The asset/equity ratio shows the relationship of the total assets of the firm to the portion owned by shareholders. This ratio is an indicator of the company's leverage (debt) used to finance the firm.

collection period

1. The average collection period is the amount of time it takes for a business to receive payments owed by its clients. 2. Companies calculate the average collection period to ensure they have enough cash on hand to meet their financial obligations. 3. Low average collection periods indicates organizations collect payments faster.

cash cycle

1. The cash conversion cycle (CCC) is a metric that expresses the length of time (in days) that it takes for a company to convert its investments in inventory and other resources into cash flows from sales. 2. This metric takes into account the time needed to sell its inventory, the time required to collect receivables, and the time the company is allowed to pay its bills without incurring any penalties. 3. CCC will differ by industry sector based on the nature of business operations.

current ratio

1. The current ratio compares all of a company's current assets to its current liabilities. These are usually defined as assets that are cash or will be turned into cash in a year or less, and liabilities that will be paid in a year or less. 2. The current ratio is sometimes referred to as the "working capital" ratio and helps investors understand more about a company's ability to cover its short-term debt with its current assets. 3. Weaknesses of the current ratio include the difficulty of comparing the measure across industry groups, overgeneralization of the specific asset and liability balances, and the lack of trending information.

debt to equity

1. The debt-to-equity (D/E) ratio compares a company's total liabilities to its shareholder equity and can be used to evaluate how much leverage a company is using. 2. Higher leverage ratios tend to indicate a company or stock with higher risk to shareholders. However, the D/E ratio is difficult to compare across industry groups where ideal amounts of debt will vary. 3. Investors will often modify the D/E ratio to focus on long-term debt only because the risk of long-term liabilities are different than for short-term debt and payables.

fixed asset turnover

1. The fixed asset turnover ratio reveals how efficient a company is at generating sales from its existing fixed assets. 2. A higher ratio implies that management is using its fixed assets more effectively. 3. A high FAT ratio does not tell anything about a company's ability to generate solid profits or cash flows.

gross margin

1. The gross profit margin shows the amount of profit made before deducting selling, general, and administrative costs. 2. Gross margin can also be shown as gross profit as a percent of net sales.

times burden covered/ interest coverage

1. The interest coverage ratio is used to see how well a firm can pay the interest on outstanding debt. 2. Also called the times-interest-earned ratio, this ratio is used by creditors and prospective lenders to assess the risk of lending capital to a firm. 3. A higher coverage ratio is better, although the ideal ratio may vary by industry.

price to earnings

1. The price-earnings ratio (P/E ratio) relates a company's share price to its earnings per share. 2. A high P/E ratio could mean that a company's stock is over-valued, or else that investors are expecting high growth rates in the future. 3. Companies that have no earnings or that are losing money do not have a P/E ratio since there is nothing to put in the denominator.

quick ratio

1. The quick ratio indicates a company's capacity to pay its current liabilities without needing to sell its inventory or get additional financing. 2. The quick ratio is considered a more conservative measure than the current ratio, which includes all current assets as coverage for current liabilities. 3. The higher the ratio result, the better a company's liquidity and financial health; the lower the ratio, the more likely the company will struggle with paying debts.

debt to assets

1. The total debt to total assets ratio shows the degree to which a company has used debt to finance its assets. 2. The calculation considers all of the company's debt, not just loans and bonds payable, and considers all assets, including intangibles. 3. If a company has a total debt to total assets ratio of 0.4, this shows that 40% of its assets are financed by creditors, with owners (shareholders) financing the remaining 60% with equity.

asset turnover

1. This metric helps investors understand how effectively companies are using their assets to generate sales. 2. Investors use the asset turnover ratio to compare similar companies in the same sector or group. 3. A company's asset turnover ratio can be impacted by large asset sales as well as significant asset purchases in a given year.