Designed to measure a company’s ability to meet its maturing short-term obligations
Current Ratio = Current Assets / Current Liabilities. Measures ability to pay bills. Rule of thumb: 2.
Quick Ratio = (Current Assets – Inventory) / Current Liabilities. Measures ability to pay bills NOW. Rule of thumb: 1.
Designed to measure management’s overall effectiveness: does the company control expenses and earn a reasonable return on funds committed?
Gross Profit Margin = Gross profit / Sales
Profit Margin = Profit after interest and taxes / Sales.
Return on Owner’s Equity = Profit attributable to parent company / Owner’s equity.
Return On Investment (from Dupont Chart) = Profit/Sales x Total Asset Turnover.
Return on Specific Assets = Profit before after interest and taxes / Inventory.
Return on Total Assets = Profit before or after interest and taxes / Total assets.
Return on Capital employed = Profit before or after interest and taxes / Capital employed
Divided into two groups which are:
a)
Examine
the asset structure of the company
b)
Analyze
the financing arrangements of the company’s total assets, in particular the
extent to which the company relies on debt. This group of rations is generally known as the gearing ratio.
Fixed to Current Asset Ratio = Fixed assets / Current assets. Meaningless without industry average to compare to.
Debt Ratio = Total debt / Total assets. Also known as the gearing or leverage ratio.
Times Interest Earned = (Profit before tax + Interest charges) / Interest charges. Measures the company’s ability to weather loss of profit or increase in interest rates without defaulting on loan obligations.
Indication of how effectively a company has been managing its assets.
Inventory Turnover = Sales / Inventory. Measures number of times inventory is turned over during a year.
Average Collection Period = Debtors / Sales per day. Calculates the average number of days a debtor goes before paying.
Fixed Assets Turnover = Sales / Fixed assets. Measures how hard assets are worked. Be careful about asset valuation. If a company has more up-to-date (therefore higher) asset values on the books, their ratio will look worse.
How outside world views the company’s future prospects.
Earnings Per Share (EPS) = Profit after tax, minority interests and extraordinary items(Net profit for the financial year) / Number of ordinary shares in issue.
Price Earnings (PE) = Market price / EPS. Measures how many years of profit you must spend to buy a share.
Dividend Yield = Dividend per share / Market value per share. Expressed as a percentage.
Dividend Cover = Net profit of the year / Dividend payout. Shows the degree to which the dividend is reasonable to pay out.