Financial Ratios

The Basics

NAV Fincorp.

Navneet.vaishaya@gmail.com
January, 2015

FINANCIAL RATIOS
Contents
Liquidity ratios .............................................................................................................................................. 5

Current Ratio ..................................................................................................................................... 5

Quick asset Ratio or Acid test ratio ................................................................................................... 5

Cash Ratio ......................................................................................................................................... 5

Profitability Ratios......................................................................................................................................... 6

Cash Return on Capital Invested ....................................................................................................... 7

DuPont Formula ................................................................................................................................ 7

Earnings Retention Ratio .................................................................................................................. 7

Rate of Return ................................................................................................................................... 8

Gross Profit Margin ........................................................................................................................... 8

Net Interest Margin........................................................................................................................... 8

Net Profit Margin .............................................................................................................................. 9

NOPLAT (Net Operating Profit less Adjusted Taxes) or EBI (Earnings before interest) .................... 9

OIBDA (operating income before depreciation and amortization) .................................................. 9

Operating Expense Ratio................................................................................................................... 9

Overhead Ratio ................................................................................................................................. 9

Profit Analysis ............................................................................................................................. .... 10

Profitability Index ............................................................................................................................ 10

Return on Assets (ROA)................................................................................................................... 10

Return on Average Assets (ROAA) .................................................................................................. 11

Return on Average Capital Employed (ROACE)............................................................................... 11

Return on Average Equity (ROAE)................................................................................................... 11

Return on Capital Employed (ROCE) ............................................................................................... 11

Return on Debt (ROD) ..................................................................................................................... 12

Return on Equity (ROE) ................................................................................................................... 12

Return on Invested Capital (ROIC) .................................................................................................. 12

Return on Investment (ROI) ............................................................................................................ 12

Return on Net Assets (RONA) ......................................................................................................... 13

Return on Research Capital (RORC) ................................................................................................ 13

Return on Retained Earnings (RORE) .............................................................................................. 13

Return on revenue (ROR) ................................................................................................................ 14

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FINANCIAL RATIOS

Return on Sales (ROS) ..................................................................................................................... 14

Revenue per Employee ................................................................................................................... 14

Leverage Ratios ........................................................................................................................................... 15

Degree of operating leverage DOL............................................................................................... 15

Degree of financial leverage DFL.................................................................................................. 15

Degree of Combined leverage DCL ............................................................................................... 16

Debt Ratio ....................................................................................................................................... 16

Debt Equity Ratio ......................................................................................................................... 16

Longterm Debt to Capitalization.................................................................................................... 16

Interest Coverage ratio ................................................................................................................... 16

Solvency ratio.............................................................................................................................................. 17
Asset Management Ratios or Efficiency ratios ........................................................................................... 18

Asset Turnover ................................................................................................................................ 18

Capacity Utilization Rate ................................................................................................................. 18

Cash Conversion Cycle (Operating Cycle) ....................................................................................... 19

Defensive Interval Ratio .................................................................................................................. 19

Fixed Asset Turnover....................................................................................................................... 19

Inventory Turnover ......................................................................................................................... 20

Account Receivable Turnover Ratio ................................................................................................ 20

Accounts Payable Turnover Ratio ................................................................................................... 21

Working Capital Ratio ..................................................................................................................... 21

Valuation Ratios .......................................................................................................................................... 22

Price/ Sales Ratio ............................................................................................................................ 22

Price/ Book Value Ratio (P/BV Ratio) .............................................................................................. 22

Price/ Earnings Ratio (P/E ratio) ..................................................................................................... 22

Price/ earnings growth ratio ........................................................................................................... 22

Price/ cash flow Ration (P/CF Ratio) ............................................................................................... 23

Equity Ratio ..................................................................................................................................... 23

Dividend Yield ................................................................................................................................. 23

Dividend Payout Ratio..................................................................................................................... 23

Debt ratio ........................................................................................................................................ 23

Enterprise multiple ......................................................................................................................... 23

EV/sales Ratio ................................................................................................................................. 24

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FINANCIAL RATIOS
Financial ratios are mathematical comparisons of financial statement accounts. These relationships
between the financial statement and accounts help investors, creditors, and internal company
management understand how well a business is performing and areas of needing improvement.
Ratio analysis is used to evaluate various aspects of a companys operating and financial performance
such as its efficiency, liquidity, profitability and solvency. Ratio analysis can provide an early warning of a
potential improvement or deterioration in a companys financial situation or performance.
Investopedia explains 'ratio analysis' While there are numerous financial ratios, most investors are
familiar with a few key ratios, particularly the ones that are relatively easy to calculate. Some of these
ratios include the current ratio, return on equity, the debtequity ratio, the dividend payout ratio and
the price/earnings (P/E) ratio.

TYPES OF FINANCIAL RATIOS

In the previous articles we discussed about financial terminologies and financial modelling. Financial
ratios will help an analyst to get a sufficient understanding of the companys financial status.
Financial ratio Analysis is a form of Financial Statement Analysis which is used to understand the firm's
financial performance in several key areas. Financial ratios are categorized according to the financial
aspect of the business which the ratio measures. Financial ratios allow for comparisons between
companies, industries and different time periods for one company.
In the analysis of financial statements it is better to have a complete understanding of the different
types of ratios, their calculation, and interpretation.
Financial ratios can be classified into five types as follows.
1.
2.
3.
4.
5.
6.
7.

Liquidity ratios,
Profitability ratios,
Leverage ratios,
Solvency ratios,
Asset Management ratios or Efficiency ratios,
Market prospect ratios,
Valuation ratios,

FINANCIAL RATIOS
Liquidity ratios
Liquidity ratios asses the firm`s ability to meet its short term liability using shortterm assets. The short
term liability are the ones recorded under current liabilities that come due within one financial year.
Shortterm assets are the current assets.
1. Current ratio
2. Quick asset ratio or Acid test ratio
3. Cash ratio

Current Ratio
The current ratio is equal to total current assets divided by total current liabilities. This indicates the
level to which current liabilities can be paid off through current assets. Most favorable case is 1:2.

Current Ratio= Current Assets/ Current liability

Quick asset Ratio or Acid test ratio

We assumes that all current assets can be converted in to cash in order to meet shortterm Liability and
to assume this is never a good idea. As firm carry some current assets which cannot be converted in cash
in short term such prepaid expenses and inventory. To fix this problem, the Quick assets ration removes
such assets from current assets.

Quick Asset Ratio =

Current Assets (prepaid expenses + Inventory)

Current liability

Cash Ratio
The cash ratio examines the ability of the firm to settle shortterm liabilities using only cash and cash
equivalents such as marketable securities. In other words, the cash ratio indicates the extent to which
current liabilities can be paid through liquid assets only.

Cash Ratio =

Cash +Marketable Securities

Current liability

FINANCIAL RATIOS
Profitability Ratios
A profitability ratio is a measure of profitability. These ratios show a companys overall efficiency and
performance. Profitability means how efficiently a firm make profit.
We can divide profitability ratio in 2 types.
Margin
Returns
Margin: It represent the firms ability to convert sales into profit at various stages.
Returns: It measure how efficiently firm generate returns for its shareholder.
Margin ratios:
1. Cash Return on Capital Invested (CROCI)
2. DuPont Formula
3. Earnings Retention Ratio
4. Rate of Return
5. Gross Profit Margin
6. Net Interest Margin
7. Net Profit Margin
8. NOPLAT (Net Operating Profit less Adjusted Taxes)
9. OIBDA
10. Operating Expense Ratio
11. Overhead Ratio
12. Profit Analysis
13. Profitability Index
Returns ratios:
14. Return on Assets (ROA)
15. Return on Average Assets (ROAA)
16. Return on Average Capital Employed (ROACE)
17. Return on Average Equity (ROAE)
18. Return on Capital Employed (ROCE)
19. Return on Debt (ROD)
20. Return on Equity (ROE)
21. Return on Invested Capital (ROIC)
22. Return on Investment (ROI)
23. Return on Net Assets (RONA)
24. Return on Research Capital (RORC)
25. Return on Retained Earnings (RORE)
26. Return on Revenue (ROR)
27. Return on Sales (ROS)
28. Revenue per Employee
29. RiskAdjusted Return

FINANCIAL RATIOS
Cash Return on Capital Invested
Cash return on capital invested (CROCI) is metric that compares the cash generated by a company to its
equity.
It is also sometimes known as cash return on cash invested. It compares the cash earned with the
money invested.

Cash Return on Capital Invested = EBITDA / Capital Invested

DuPont Formula
Also known as the DuPont analysis, DuPont Model, DuPont equation or the DuPont method.
This method is to assess the company's return on equity (ROE) breaking its into three parts.
DuPont model tells:
Operating efficiency, which is measured by net profit margin;
Asset use efficiency, which is measured by total asset turnover;
Financial leverage, which is measured by the equity multiplier;
If ROE is insufficient, the DuPont analysis helps to locate the part of the business that is
underperforming.

DuPont analysis= (Net profit / revenue) X (Revenue / Total assets) X (Total assets /
equity)

Earnings Retention Ratio

Earning Retention Ratio is also called as Plowback Ratio. As per definition, Earning Retention Ratio or
Plowback Ratio is the ratio that measures the amount of earnings retained after dividends have been
paid out to the shareholders. The prime idea behind earnings retention ratio is that the more the
company retains the faster it has chances of growing as a business.
This is also known as retention rate or retention ratio.

= Plowed back gross profits / total gross profits

= Total Gross Profits Payout ratio
Payout ratio is the exact opposite of the plowback ratio, the percentage of total gross profits paid out to
shareholders/owners of the company (usually in the form of dividends).

= (Total Net Profit / Number of Total share) - (Dividend / Share)

The investors prefer to have a higher retention ratio in a fast growing business, and lower retention
ratio in a slower growing business.

FINANCIAL RATIOS
Rate of Return
The rate of return is the rate of interest on an investment annually when compounding occurs more
than once.

ROR (For Single period) = (Vf- Vi) / Vi

ROR (For Compounded period) = (1+R) 1/t -1
(OR)
ROR (For Compounded period) = (1+ (i/t)) t -1
Where:
VF = Final Value of investment
Vi = Invested Value
I= Annual interest rate
t =Number of compounding periods

Gross Profit Margin

Gross margin is a good indication of how profitable a company is at the most fundamental level, how
efficiently a company uses its resources, materials, and labour.
Gross profit margin is the ratio of gross profit to sales revenue. Gross margins reveal how much a
company earns taking into consideration the costs that it incurs for producing its products or services.
Gross margin measures a company's manufacturing and distribution efficiency during the production
process. Investors use the gross profit margin to compare companies in the same industry and also in
different industries to determine what are the most profitable.

Gross profit margin = Gross profit / Revenue

(OR)
Gross profit margin = (Revenue COGS) / Revenue

Net Interest Margin

The net Interest margin can be expressed as a performance metric that examines the success of a firms
investment decisions as contrasted to its debt situations. A negative Net Interest Margin indicates that
the firm was unable to make an optimal decision, as interest expenses were higher than the amount of
returns produced by investments. This is a useful measure to track the financial institutions profitability.

Net Interest Margin = (Investment Returns Interest Expenses) / Average Earning

Assets

FINANCIAL RATIOS
Net Profit Margin
Net profit margin (or profit margin, net margin, return on revenue) is a ratio of profitability calculated as
Profit after tax (PAT or net profits) divided by sales (revenue). Net profit margin is displayed as a
percentage.
Net profit margin is a key ratio of profitability. It is very useful when comparing companies in similar
industries. A higher net profit margin means that a company is more efficient at converting sales into
actual profit.

Net profit margin = Profit after tax / Revenue

NOPLAT (Net Operating Profit less Adjusted Taxes) or EBI (Earnings before
interest)
It is a measurement of profit which includes the costs and the tax benefits of debt financing. It is a
firms total operating profit where adjustments for taxes are made. It shows the profits that are
generated from the core operations of a company after making the deductions of income taxes which
are related to the companys core operations. For discounted cash flow models (DCF), often NOPLAT is
used.

NOPLAT = Operating Income x (1 tax rate)

OIBDA (operating income before depreciation and amortization)

It is a Non GAAP related measurement of finance. For a public company, it is always better to report
earnings based on OIBDA calculation as it is always higher than any other figure. If a public company is
looking to impress the stakeholders, then it is advisable that it reports earnings after calculating OIBDA.

OIBDA = Operating income + Depreciation + Amortization

Operating Expense Ratio

The investors using this ratio can further compare any type of expense including insurance, utilities,
taxes and maintenance, to the gross income, and the sum of all expenses to the gross income.
The main items included in the operating expense include property management, property taxes,
utilities, wages, insurance, fees, supplies, repairs and maintenance, advertising, accounting fees and
similar more. However, the items not included in operating expenses are personal property, loan
payments, and capital improvements.

Operating Expense Ratio = Operating Expenses / Effective Gross Income

Overhead Ratio
Overhead ratio is the comparison of operating expenses and the total income which is not related to the
production of goods and service. The operating expenses of a company are the expenses that incurred
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by the company on a daily basis. The operating expenses include maintenance of machinery, advertising
expenses, depreciation of plant, furniture and various other expenses.

Overhead ratio = Operating Expenses / (Taxable net interest income + Operating

income)

Profit Analysis
In managerial economics, profit analysis is a form of cost accounting used for elementary instruction and
short run decisions. A profit analysis widens the use of info provided by breakeven analysis. An
important part of profit analysis is the point where total revenues and total costs are equal. At this
breakeven point, the company does not experience any income or any loss.

Profit Volume Ratio = (Shareholders contribution / Sales) * 100

Profitability Index
The profitability index (PI) also known as profit investment ratio (PIR) and value investment ratio (VIR)
refers to the ratio of discounted benefits over the discounted costs. It is an evaluation of the profitability
of an investment and can be compared with the profitability of other similar investments which are under
consideration. The profitability index is also referred to as benefitcost ratio, costbenefit ratio, or even
capital rationing. The profitability index is one of the numerous ways used to quantify and measure the
efficiency of a proposed investment.

Profitability index (PI) = PV of future cash flow / Initial investment

Rules for selection or rejection of a project:

If PI > 1 then accept the project

If PI < 1 then reject the project

Return on Assets (ROA)

Return on assets (ROA) is a financial ratio that shows the percentage of profit that a company earns in
relation to its overall resources (total assets). Return on assets is a key profitability ratio which measures
the amount of profit made by a company per dollar of its assets.

ROA = Net Income after tax / Total assets

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Return on Average Assets (ROAA)
Return on Average Assets (ROAA) can be defined as an indicator used to evaluate the profitability of the
assets of a firm. The return on average assets is useful in measuring profits against the assets used by a
company for generating profits.

ROA = Net Income after tax / Average Total assets

Return on Average Capital Employed (ROACE)

As stated by Investopedia, the return on average capital employed is helpful for analyzing businesses in
capitalintensive industries, oil for example. The businesses capable of squeezing higher profits from a
smaller amount of capital assets will feature a higher ROACE as compared to those which are not
efficient in transforming capital into profits.

ROACE = EBIT / (Average Total Assets - Average Current Liabilities)

Capital Employed = Total Assets Current Liabilities = Equity + Non-current Liabilities

Return on Average Equity (ROAE)

The return on average equity (ROAE) refers to the performance of a company over a financial year. This
ratio is an adjusted version of the return of equity that measures the profitability of a company. The
return on average equity, therefore, involves the denominator being computed as the summation of the
equity value at the beginning and the closing of a year, divided by two.

ROAE = Net Income / Avg. Stockholders' Equity

Return on Capital Employed (ROCE)

Return on capital employed (ROCE) is a measure of the returns that a business is achieving from the
capital employed, usually expressed in percentage terms. Capital employed equals a company's Equity
plus Noncurrent liabilities (or Total Assets Current Liabilies), in other words all the longterm funds
used by the company. ROCE indicates the efficiency and profitability of a company's capital investments.

Return on capital employed (ROCE)

= EBIT / Capital Employed
(OR)
= EBIT / (Equity + Non-current Liabilities)
(OR)
= EBIT / (Total Assets - Current Liabilities)

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Return on Debt (ROD)
The return on debt (ROD) can be expressed as the quantification of a companys performance or net
income as allied to the amount of debt issued by the company. As stated by Investopedia, the return on
debt is an intricate financial modeling skill rather than being a commonly used financial reporting factor.

Return on Debt (ROD) = Net income / long term Debt

Return on Equity (ROE)

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. It
reveals how much profit a company earned in comparison to the total amount of shareholder equity
found on the balance sheet.

Return on equity (ROE) = Net Income after Tax / Average Shareholder's equity

Return on Invested Capital (ROIC)

ROIC is the capital which is return on investment in business is a hightech way of examining a stock at
return on investment that corrects for some specialties of Return on Assets and Return on Equity. It is a
valuable knowing that how to translate it because its a better evaluation of profitability than Return on
Assets and Return on Equity as the whole. Fundamentally ROIC mends on Return on Assets and Return
on Equity because it places the liability and equity financing at a comparable footing. It gets rid of the
debt related to aberration that can make extremely leveraged organizations look very productive when
they using return On Equity.

Return on invested capital (ROIC) = Net operating profit after tax (NOPAT) / Capital
Investment
(Or)
ROIC = (Net Income - Dividends) / Capital Investment

Return on Investment (ROI)

Return on investment (ROI) is performance measure used to evaluate the efficiency of investment. It
compares the magnitude and timing of gains from investment directly to the magnitude and timing of
investment costs. It is one of most commonly used approaches for evaluating the financial
consequences of business investments, decisions, or actions.
ROI is an important financial metric for:

Asset purchase decisions (such as computer systems, machinery, or service vehicles)

Approval and funding decisions for projects and programs of different types (for example
marketing programs, recruiting programs, and training programs)
Traditional investment decisions (for example management of stock portfolios or the use of
venture capital).

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Return on Investment (ROI) = (Gains from Investment Cost of Investment) / Cost of
Investment
(OR)

Return on Investment = Net profit after interest and tax / Total Assets

Return on Net Assets (RONA)

The return on net assets (RONA) is a comparison of net income with the net assets. This is a metric of
financial performance of a company that takes into account earnings of a company with regard to fixed
assets and net working capital.
The return on net assets (RONA) helps the investors to determine the percentage net income the
company is generating from the assets.

Return on Net Assets = Net Income / (Fixed Assets + Net Working Capital)

Return on Research Capital (RORC)

The return on research capital (RORC) is a calculation used to assess the revenue earned by a company
as an outcome of expenditures made on research and development activities. The return on research
capital is an element of productivity and growth, as research and development is one of the techniques
employed by the companies to develop new products and services for sale. This metric is generally used
in industries that depend largely on R&D like the pharmaceutical industry.

RORC = Current Year Gross Profit / Previous Year R&D Expenditures

Return on Retained Earnings (RORE)

The return on retained earnings (RORE) is a calculation to reveal the extent to which the previous year
profits were reinvested. The return on retained earnings is expressed as a percentage ratio. A higher
return on retained earnings indicates that a company would be better off reinvesting the business. On
the contrary, a lower return on retained earnings indicates that paying out dividends might prove to be
in the companys best interests.
As stated by Investopedia, it can generally, as an investor, be difficult to evaluate the worth of a
company by just having a look at its balance sheet. A return on retained earnings computation can be
helpful in assuaging some of the confusion in addition to clarifying unerringly what the numbers are
trying to say. For investors, a general rule of thumb is to look for companies featuring a high return on
retained earnings which is regularly reinvested
To calculate return on retained earnings, compare the total amount of profit per share retained by a
company over a given period of time against the change in profit per share over that same time period.

Return on Retained Earnings (RORE) = Change in profit per share for the period /
Retained profit per share for the period
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Return on revenue (ROR)
The return on revenue (ROR) is a measure of profitability that compares net income of a company to its
revenue. This is a financial tool used to measure the profitability performance of a company. Also
called net profit margin.
The return on revenue (ROR) is tool for measuring the profitability performance of a company from year
to year. This ratio compares the net income and the revenue. An increase in ROR is means that the
company is generating higher net income with lesser expenses.
This ratio can help the management in controlling the expenses. It can give indications of rising expenses.
If a decrease in return on revenue is observed, the management should know that the expenses are not
being managed as efficiently as in the past. The management should find out why the expenses are rising
and then take steps to reduce them. An increase in the ROR is an indication that the expenses of the
company are being facilitated efficiently. These insights can help to see a clearer picture of the expenses
and it can help to control expenses.

Return on Revenue (ROR) = Net Income / Revenue

Return on Sales (ROS)

Return on sales (ROS) is a ratio widely used to evaluate an entity's operating performance. It is also
known as "operating profit margin" or "operating margin". ROS indicates how much profit an entity
makes after paying for variable costs of production such as wages, raw materials, etc. (but before
interest and tax). It is the return achieved from standard operations and does not include unique or one
off transactions. ROS is usually expressed as a percentage of sales (revenue).

Return on sales (operating margin) = EBIT / Revenue

Revenue per Employee

Revenue per employee measures the amount of sales generated by one employee. This is a measure of
performance of human resources of a company. It is an indicator of productivity of companys
personnel. It also indicates how efficiently a company is utilizing its human resources.
Generally speaking higher the revenue per employee figure is, the better it is. But revenue per employee
will vary in different industries according to intensity of labor. Revenue per employee is less in the
industries which are laborintensive. On the other hand this metric is higher in the high tech, low labor
intensive companies.

Revenue per Employee = Sales Revenue / Number of Employees

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Leverage Ratios
Any ratio used to calculate the financial leverage of a company to get an idea of the company's
methods of financing or to measure its ability to meet financial obligations. There are several
different ratios, but the main factors looked at include debt, equity, assets and interest expenses.
Leverage ratios are for evaluating solvency and capital structure.

1.
2.
3.
4.
5.
6.
7.

Degree of operating leverage DOL

Degree of financial leverage DFL
Degree of Combined leverage DCL
Debt Ratio
Debt Equity Ratio
Longterm Debt to Capitalization
Interest Coverage ratio

Degree of operating leverage DOL

The Degree of Operating Leverage Ratio helps a company in understanding the effects of operating
leverage on the companys probable earnings. It is also important in determining a suitable level of
operating leverage which can be used in order to get the most out of the companys Earnings before
interest and taxes or EBIT.
If the operating leverage is high, then a smallest percentage change in sales can increase the net
operating income.

= % Change in EBIT / % Change in Sales

(Or)
= Contribution / EBIT
(Or)
= Q*(P-V) / (Q*(P-V)-F)
DOL measures the sensitivity of NOI to changes in the firms revenues.

Degree of financial leverage DFL

Financial leverage measures the sensitivity of the firms net income (NI) to changes in its net operating
income (NOI). In contrast to operating leverage, which is determined by the firms choice of technology
(fixed and variable costs), financial leverage is determined by the firms financing choices (the mix of
debt and equity).

= % Change in EPS / % Change in EBIT

(OR)
= EBIT/EBIT- Interest
(Or)
= (Q*(P-V)-F) / (Q*(P-V)-F-I)
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Degree of Combined leverage DCL
Combined leverage measures the overall sensitivity of the firms net income (NI) to a change in sales.
The degree of combined leverage (DCL) measures the percentage change in net income for a given
percentage change in sales:

= Percentage change in NI / Percentage change in Sales

(Or)
= (Q*(P-V)) / (Q*(P-V)-F-I)
(Or)
=Contribution / EBIT- Interest

Debt Ratio
The debt ratio indicates the proportion of assets financed through both shortterm and longterm debt.

Debt ratio= Total liability / Total assets

Debt Equity Ratio

The debt to equity ratio of a company or sector informs investors of the correlation between capital
contributions from creditors and shareholders in a manner that speaks to a companys degree of
liquidity.

Debt to equity ratio= Long term debt / Shareholders Equity

Longterm Debt to Capitalization

Long-term Debt to Capitalization = Long-Term Debt / (Long-Term Debt + Shareholders
Equity)
Where:Shareholders equity = Total Assets Total liability
(Or)
Share Capital + Retained earning + Treasury Shares

Interest Coverage ratio

The interest converge ratio, also known as the timesinterest earned. It is the ratio of EBIT to interest
charge. The ratio shows number of times the interest payment are covered by the firm`s operating
earnings. The larger the coverage the better their ability of the firm to service interest obligations on
debt.

Interest Coverage ratio= EBIT / Interest Expenses

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Solvency ratio
Solvency ratio is a key metric to find measure an enterprises ability to meet its debt and other
obligations.

Solvency ratio = PAT + Depreciation/Total liability (Long term liability + Short term
liability)
Lower solvency ratio means the high probability to default on its debts obligations.

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Asset Management Ratios or Efficiency ratios
Asset management ratios are the key to analyzing how effectively and efficiency your business is
managing its assets to generate sales. Asset management ratios are also called turnover ratios or
efficiency ratios.
1.
2.
3.
4.
5.
6.
7.
8.
9.

Asset Turnover Ratio

Capacity Utilization Rate
Cash Conversion Cycle (Operating Cycle)
Defensive Interval Ratio
Fixed Asset Turnover ratio
Inventory Turnover ratio
Account Receivable Turnover Ratio
Accounts Payable Turnover Ratio
Working Capital Ratio

Asset Turnover
It is a measure of how efficiently management is using the assets at its disposal to promote sales.
The ratio helps to measure the productivity of a company's assets.

Asset turnover
= Revenue / Average total assets
Asset turnover (days) = 365 / Asset turnover

Capacity Utilization Rate

Capacity utilization rate also helps in verifying the level at which piece costs will rise. Capacity
utilization rate is best when used for companies that manufacture physical products instead of
services, as it is easy to quantify goods than services.

The capacity utilization rate = (Actual Output Potential Output) / Potential Output x 100

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Cash Conversion Cycle (Operating Cycle)
It is the time between the purchase of inventory and the receipt of cash from accounts receivable. It
is the time required for a business to turn purchases into cash receipts from customers. It also
represents the number of days a firm's cash remains tied up within the operations of the business.
The cash conversion cycle is also known as the cash cycle, asset conversion cycle or net operating
cycle.

Cash Conversion Cycle =

Days Inventory Outstanding + Days sales outstanding Days Payable Outstanding
Days inventory outstanding* = 365 / Inventory turnover
Days Payable Outstanding*= 365 /Accounts payable turnover ratio
Days Sales Outstanding*=365 / Receivables Turnover Ratio

Defensive Interval Ratio

Defensive Interval Ratio is an efficiency ratio that measures how many days a company can
operate without having to access noncurrent or long term assets.
This ratio compares the assets to the liabilities instead of comparing assets to expenses.
Defensive Interval Ratio is a good way to find out if the company is a good investment for you
or not. Defensive Interval Ratio is also called as Defensive Interval Period.
Defensive Interval Ratio = Current Assets / Daily Operational Expenses (In days)
The defensive assets are all the assets that you can sell which you can make use of whenever
you need them by selling them or also the amount that is owed to you by a defaulter. To
calculate defensive interval ratio we can make use of
Operational Expenses = Defensive assets Non-cash charges
Defensive Interval Ratio* = Current Assets / (Defensive assets Non-cash
charges)/360

Fixed Asset Turnover

Fixed asset turnover ratio compares the sales revenue a company to its fixed assets. This ratio
tells us how effectively and efficiently a company is using its fixed assets to generate revenues.
This ratio indicates the productivity of fixed assets in generating revenues. If a company has a
high fixed asset turnover ratio, it shows that the company is efficient at managing its fixed
assets. Fixed assets are important because they usually represent the largest component of
total assets.

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There is no standard guideline about the best level of asset turnover ratio. Therefore, it is
important to compare the asset turnover ratio over the years for the same company.
Fixed asset turnover= Sales Revenue / Total Fixed Assets

Inventory Turnover
Inventory turnover is a measure of the number of times inventory is sold or used in a given time
period such as one year. It is a good indicator of inventory quality (whether the inventory is
obsolete or not), efficient buying practices, and inventory management. This ratio is important
because gross profit is earned each time inventory is turned over. Also known as stock
turnover.
Inventory turnover = Cost of goods sold / Average Inventory
The number of days in the period can then be divided by the inventory turnover formula to
calculate the number of days it takes to sell the inventory on hand or "Inventory turnover
days":
Days inventory outstanding = 365 / Inventory turnover

Average Inventory*= (Beginning inventory + Ending inventory)/2

Cost of goods sold*= Beginning Inventory + Purchases - Ending Inventory
OR
Cost of goods sold* =Average Cost per Unit x Units Sold

Account Receivable Turnover Ratio

The receivable turnover ratio (debtors turnover ratio, accounts receivable turnover ratio). This
ratio determines how quickly a company collects outstanding cash balances from its customers
during an accounting period. It is an important indicator of a company's financial and
operational performance and can be used to determine if a company is having difficulties
collecting sales made on credit.
Receivable turnover ratio indicates how many times, on average, account receivables are
collected during a year.
Account Receivables turnover ratio = Net credit sales / Average accounts receivables
Accounts Receivable outstanding or Average collection period in days:
Average collection period = 365 / Receivables Turnover Ratio
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(OR)
(Days X Average amount of accounts receivables)/credit sales

Accounts Payable Turnover Ratio

It is an accounting liquidity metric that evaluates how fast a company pays off its suppliers. An
accounts payable turnover ratio measures the number of times a company pays its suppliers during
a specific accounting period.

Accounts payable turnover ratio = Total purchases / Average accounts payable

Days Payable Outstanding = 365 /Accounts payable turnover ratio
Total Purchases* = Cost of sales + Ending inventory Starting inventory

Working Capital Ratio

The working capital ratio, also called the current ratio, is a liquidity ratio that measures a firm's ability
to pay off its current liabilities with current assets. The working capital ratio is important to creditors
because it shows the liquidity of the company.

Working capital ratio= Current Assets / Current liability

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Valuation Ratios
As an investor it is vital that you find a stock at a good entry point. The best way to help you find a good
entry point is to do some fundamental analysis and try to figure out what an appropriate valuation for
the stock is. In order to incorporate valuation into a stock strategy you must first understand how to go
about valuing a stock.
A valuation ratio is a measure of how cheap or expensive a security or business is, compared to some
measure of profit or value. A valuation ratio is calculated by dividing a measure of price by a measure of
value, or viceversa. The point of a valuation ratio is to compare the cost of a security (or a company, or a
business) to the benefits of owning it.

Price/ Sales Ratio

P/S is a commonsense ratio: The lower the better, although there's no specific rule or normalizing
factor like growth. Somewhere around 1.0 is usually considered good.

Price to Sales Ratio = Stock Price per share / Sales per share

Price/ Book Value Ratio (P/BV Ratio)

Price / Book Value is also a regularly reported and watched valuation ratio. It indicates the market price
of a share in terms of the book value of equity. It is the rupee amount an investor has to pay for each
rupee of book value.

Price to Book Ratio (P/BV Ratio) = Stock Price per share / Book Value per Shares
Book Value per share*= Equity/Number of share

Price/ Earnings Ratio (P/E ratio)

This is the most widely used valuation ratio. It indicates the market price of a share in terms of earnings.
It is the rupee amount an investor has to pay for each rupee of earnings made by the firm for the
ordinary shareholder.

Price to Earnings Ratio (P/E ratio) = Stock Price per share / Earnings per share (EPS)
EPS*= Net Income/Number of Shares

Price/ earnings growth ratio

When comparing businesses, one popular way to "normalize" P/Es is to compare them to their
respective company's growth rate. From this comparison, get to know another derivative of P/E,
price/earnings to growth, or PEG.

Price to earnings growth ratio = Price/ Earnings Ratio / Annual EPS growth rate
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Price/ cash flow Ration (P/CF Ratio)
The price/cash flow indicates the price of a share in terms of the cash flow per share. It shows the rupee
amount an investor has to pay for each rupee of cash flow generated.

Price/ cash flow ratio = stock price per share/ Cash flow per share
Cash flow*=Total cash flow/ Number of shares
Total cash flow* = Net income + Depreciation & Amortization

Equity Ratio
The equity ratio is an investment leverage or solvency ratio that measures the amount of assets that are
financed by owners' investments by comparing the total equity in the company to the total assets.

Equity ratio= Total Equity / Total Assets

Higher equity ratios are typically favorable for companies

Dividend Yield
The dividend yield indicates the dividend income as a percentage of the investment. It is calculated
as the common dividend per share dividend by the market price per share.

Dividend Yield = Dividend per share / Share price

Dividend per share (DPS)*= Total Dividend/ Number of Shares

Dividend Payout Ratio

The dividend payout ratio measures the percentage of net income that is distributed to shareholders in
the form of dividends during the year. In other words, this ratio shows the portion of profits the
company decides to keep to fund operations and the portion of profits that is given to its shareholders.

Dividend payout ratio = Total dividend / Net Income

Debt ratio
Debt ratio is a solvency ratio that measures a firm's total liabilities as a percentage of its total assets. In a
sense, the debt ratio shows a company's ability to pay off its liabilities with its assets. In other words,
this shows how many assets the company must sell in order to pay off all of its liabilities.

Debt ratio = Total Liability/ Total Assets

Enterprise multiple
The main advantage of enterprise multiple over the PE ratio is that it is unaffected by a company's
capital structure, in accordance with capital structure irrelevance. It compares the value of a
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business, free of debt, to earnings before interest. A low ratio indicates that a company might be
undervalued.

Enterprise multiple = EV / EBITDA

EV/sales Ratio
=Enterprise Value / Net Sales

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Amit Kumar Jain

Reference: www.wikipedia.com
www.lnvestopedia.com
www.readyratios.com

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