Ratios

Asset formula

Equity + Liabilities

Current ratio

Current Asset/Current liabilities

→ short-term liquidity (one year/less) + cover obligation 

→ Too high = pas efficace lol (bad cash management with cash that could be invested, customers too long to pay, etc.)

Between 1,5 and 2 = GOOD

Grande surface + magasins => low ratios

Quick Ratio or Acid-Test ratio

(Cash + Cash equivalent + Market securities + Account receivables)/Liabilities 

→ pay short term liabilities w/o selling inventory (less liquid) 

=> Important pour entreprises w/loads of inventory (Airbus) VS less important pour vente

• >1 can pay short term liabilities/loans with liquid assets 

Cash-flow ratio

Operating cash flow/current liabilities

→ est-ce qu’on génère assez de cash pour payer nos short term debts

• >1=can pay current liabilities with cash generated, 0.5-1=moderate liquidity, <0.5=weak liquidity 

→ unlike current ratio => full cash + useful for companies with volatile earnings (pov les influvoleurs aka Maeva crocro bien)

AVCP (Average collection period)

(Account receivables x 360)/Sales

→ how much time does customers take to pay US la moula 

• Lower better BUT too low t’es trop strict ma star

APP (Average Payable Period)

(Account payable x 360)/COGS (Cost of good sold)

→ how much time you pay your suppliers lol 

• Good if high BUT too high tu peux avoir des problèmes 

• Small firms often have shorter APP bc less bargaining power. 

ICP (Inventory Collection Period)

(Inventories x 360)/COGS

→ How long you keep inventory before selling it

• High = slow moving stock (can be Airbus), very ICP = stockout

• retail = fast turnover, luxury good lower = LOWER TURNOVER HERMÈS 

Cash Conversion Cycle (CCC)

ACP + ICP - APP

→ Days between paying suppliers and collecting cash from customers 

• Negative ideal → Amazon, big retailers

• long CCC common in manufacturing and long processes (Airbus) 

→ efficiency 

EBIT (Earnings before interest and taxes)

Revenues - Operating expenses

→ measures operating performance

• key for comparing companies with different debt levels

• Sensitive to depreciation policies

EBITDA (Brut)

EBIT + Depreciation + Amortisation

→ cash profitability from operations

• Useful in capital-intensive industries.

• Often used for valuation multiples (EV/EBITDA).

ROS (Return on Sales)

Net profit/Sales

→ How much profit is made from € sales

• varies btw industry

• retail low margin, luxury very high margin 

ROA (Return on Assets)

Net income/total assets

→ how efficiently asset generates profit (using assets to create revenues) 

• Asset-heavy industries (airlines, utilities) have lower ROA.

• Compare over time for efficiency improvements.

ROCE (Return on Capital Employed)

EBIT/Capital Employed

→ return generated by investments used in operations => measure operating profitability relative to long-term capital invested (+ 1 year)

• More robust than ROA for firms with very different financing structures

• ROCE > Cost of Capital → value creation (otherwise you loose value)

• ROCE > better it is

ROE (Return on Equity) 

Net profit/Equity 

→ How much do shareholders gain from shares of company: measure financial performance

• High ROE may be due to high leverage, not better performance

• Should be interpreted including risk and capital structure

→ Crypto + Musk 

EPS (Earring per Share) 

Net profit/number of shares outstanding

→ how much profit is distributed per share (ex: Nezuko’s bamboo snack company, sold for 12 coins, her company is divided by 4 and Tanjiro and Inozuke each have one share while nezuko has 2 so 12/4=3 coins, Tanjiro and Inozuke will each get 3 coins and she will get 6 coins) 

• Affected by share buybacks.

• Volatile year to year.

PER or P/E (Price-to-Earnings ratio)

Share price/EPS

→ en gros cmb tu paye pour voir le profit de la compagnie 

• Valuation ratio reflecting market expectations of growth and risk.

• → High P/E → growth expectations or low perceived risk.

• → Strongly varies by sector (tech = high; utilities = low).

Combien t’es prêt à payer pour 1€ de profit de la compagnie (en gros te donne la vibe du marché et des investisseurs) 

Debt to equity

Long-term debt/Equity 

→ how much company relies on debt compared to equity 

• If low, you rely on your propre moula 

• If high, you rely external financing: 

• → DEBT=“tax shield” parce tu peux pas taxer (cheh Macron), not dilute ownership (si tu ajouter plus de part bc tu veux être financer par equity bah t’as moins de propriété, ça peut passer de 10% à 7%) BUT very risk !!! 

Gearing 

Long-term debt/Equity 

→ same thing 

TIE (Time-Interest Earned)

EBIT/Interest expense

→ How many times the company can pay its interest

• TIE < 4 danger zone