Financial Ratios

Financial Ratios

Relationships between two or more financial variables or between financial variables and time.

Trend Analysis

Examination of a venture's performance over time.

Cross-Sectional Analysis

Comparison of a venture's performance against another firm at the same point in time.

Industry Comparables Analysis

Comparison of a venture's performance against the average performance of other firms in the same industry.

Cash Burn

Cash a venture expends on its operating and financing expenses and its investments in assets.

Cash Burn Rate

Cash burn for a fixed period of time, typically a month.

Cash Build

Net Sales less the increase in Receivables. Cash Build = Net Sales - (Receivables t+1 - Receivables t)

Cash Build Rate

Cash build for a fixed period of time, typically a month.

Net Cash Burn

When cash burn exceeds cash build in a specified time period; also cash burn less cash build. Net Cash Burn = Cash Burn - Cash Build.

Net Cash Burn Rate

Net cash burn for a fixed period of time, typically a month.

Liquidity Ratios

Ratios that indicate the ability to pay short-term liabilities when they come due. Current Ratio, Quick Ratio, NWC to Total Assets Ratio.

Liquid Assets

Sum of a venture's cash and marketable securities plus its receivables.

Current Ratio

A simple indication of the margin of current assets over Current Liabilities. Current Ratio = Average Current Assets/Average Current Liabilities. A Current Ratio of 1.0 or more indicates if all current assets could be converted into cash, they would be ad

Quick Ratio

Measures the ability of liquid assets to pay current liabilities. Quick Ratio = (Average Current Assets - Average Inventories)/Average Current Liabilities. A Quick ratio of less than 1.0 indicates that the venture's liquid assets would not be adequate to

Net Working Capital

Current Assets minus Current Liabilities

NWC-to-Total-Assets

NWC-to-Total-Assets = (Average Current Assets - Average Current Liabilties)/Average Total Assets. The higher the percentage is, the greater the liquidity is, other things being equal.

Conversion Period Ratios

Ratios that indicate the average time it takes in days to convert certain current assets and current liability accounts into cash. Operating Cycle, Cash Conversion Cycle, Inventory-to-Sale Conversion Period, Sale-to-Cash Conversion Period, Purchase-to-Pay

Operating Cycle

Time it takes to purchase required materials, assemble, and sell the product plus the time needed to collect receivables if the sales are on credit. If the Sales-to-Cash Conversion Period equals 57 days, and the Inventory-to-Sale Conversion Period equals

Cash Conversion Cycle

Sum of the inventory-to-sale conversion (amount of time taken to buy materials and product a finished good) and the sale-to-cash conversion (time needed to collect sales made on credit) period less the time taken to pay suppliers for purchases on credit (

Inventory-to-Sale Conversion Period

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Sale-to-Cash Conversion Period

Measures the average days of sales committed to the extension of trade credit. Sales-to-Cash Conversion Period = Average Receivables/(Net Sales/365). Analysts may refer to this calculation as the "days of sales outstanding" or the "average collection peri

Purchase-to-Payment Conversion Period

Measures the average time from a purchase of materials and labor to actual cash payment. The ability to delay payment is analogous to borrowing money from suppliers and employees and, therefore, decreases the need for external financing. Purchase-to-Payme

Leverage Ratios

Ratios that indicate the extent to which the venture has used debt and its ability to repay its debt obligations. Total-Debt-to-Total-Assets Ratio, Equity Multiplier, Debt-to-Equity Ratio, Current-Liabilities-to-Total-Debt, Interest Coverage, and Fixed-Ch

Loan Principal Amount

Dollar amount borrowed from a lender.

Interest

Dollar amount paid on the loan to a lender as compensation for making the loan.

Total-Debt-to-Total-Assets Ratio

Total-Debt-to-Total-Assets Ratio = Average Total Debt/Average Total Assets. By comparing a venture's total debt (current liabilities plus long-term debt) to its total assets, we can construct a quick picture of how much of the venture has been pledged to

Equity Multiplier

This ratio summarizes the venture's debt position from a different vantage point, total assets divided by owners' equity. It shows the magnification of equity injections into amount of assets. Equity Multipler = Average Total Assets/Average Owners' Equity

Debt-to-Equity Ratio

A direct comparison of debt and equity gives yet another view of the same scenery. For a total-debt-to-total-assets ratio of 0.5, we get an equity multiplier of 2 and a debt-to-equity ratio of 1. The debt-to-equity ratio equals total debt to total assets

Current-Liabilities-to-Total-Debt Ratio

While a debt snapshot is useful, survival is about current debt obligations. Accounting rules have simplified this determination by requiring that the current portion of long-term debt obligations (that which is due soon) be classified as a current liabil

Interest Coverage

Interest repayments represent the most frequent type of debt flow facing a borrower. As long as payments are made, the principal amount frequently can be rolled over with an existing or new lender. To calculate interest coverage, we divide a venture's ear

Fixed-Charges Coverage

Interest repayments often are not the only payments that need to be made to creditors. For instance, if a venture decides to rent or lease equipment or buildings, periodic (often monthly) payments must be made. Also, many debt arrangements stipulate that

Sinking-Fund Payments

Periodic repayments of a portion of debt principal.

Profitability and Efficiency Ratios

Ratios that indicate how efficiently a venture controls its expenses and uses its assets. Gross Profit Margin, Operating Profit Margin, Net Profit Margin, NOPAT Margin, Sales-to-Total-Assets, Operating Return on Assets, Return on Assets (ROA), Return on E

Gross Profit Margin

Dividing the gross profit (net sales minus cost of goods sold) by the venture's net sales or revenues. Gross Profit Margin = (Net Sales-Cost of Goods Sold)/Net Sales

Operating Profit Margin

Dividing the venture's operating income, measured as the earnings before interest and taxes (EBIT), by the venture's net sales. If a company has 8% operating profit margin on its sales after covering production and other operating costs, and then can also

Net Profit Margin

The bottom line for a company's owners is whether the company made a profit after all expenses have been taken into account. As a venture matures, a net income or net profit is an increasingly critical source of financing. Remember that net income is the

Interest Tax Shield

Proportion of a venture's interest payment that is paid by the government because interest is deductible before taxes are paid. This is basically a gift from the government for using debt instead of equity.

NOPAT

Net Operating Profit after Taxes or EBIT times one minus the firm's tax rate. NOPAT = EBIT(1 - Tax Rate) / Net Sales. This is the profit that each firm would have had in the absence of financial leverage - that is, after restating taxes to what they would

Sales-to-Total Assets Ratio

Ideally, it would be great for a company to be able to generate revenues without having to invest in any assets. The Sales-to-Total Assets Ratio tells you how many times your sales are covered by your Total Assets base. Sales-to-Total Assets = Net Sales/A

Operating Return on Assets

Every venture must be able to generate profits from operations if it is to survive. We can calculate the operating return on average assets, which is sometimes called the venture's basic earning power. Operating Return on Assets = EBIT/Average Total Asset

ROA Model

The decomposition of ROA into the Product of the net profit margin and the sales-to-total-asset ratio. Return on Assets can be stated as ROA = (Net Income/Sales) x (Net Sales/Average Total Assets)

Return on Assets (ROA)

Return on Assets = Net Income/Average Total Assets. If a company has a ROA of 5 percent, then that means that it earned 5 percent on its assets base.

Return on Equity (ROE)

This calculates the single-period returns using accounting information. For a venture organized as a corporation, owners' equity often is referred to as shareholders' equity, which may comprise a common stock account and accumulated retention of profits a

ROE Model

The decomposition of ROE into the product of the net profit margin, the sales-to-total assets ratio, and the equity multiplier. ROE = ROA * Equity Multiplier. ROA = Net Profit Margin x Asset Turnover. Asset Turnover = Net Sales/Average Total Assets. Equit

Price to Earnings Ratio (P/E)

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P/E to Growth Ratio (PEG)

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Price to Sales

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Price to Book

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Price to Cash Flow or Free Cash Flow

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Dividend Yield/Payout

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Capital Gains

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