Finance Ratios

Return on Equity (ROE)

• profit for shareholders, generated from equity

• shows how efficiently a company is using shareholders' money to generate profits for them

• = Net Income/Total Equity

Return on Assets (ROA)

• profit generated from assets

• measures how efficiently a company uses its total assets to generate net income

• = Net Income/Total Assets

Return on Net Assets (RONA)

• returns relative to net assets in use

• measures how efficiently a company generates profit from its net assets

• = Net Income/Net Assets

  • (Net Assets = Fixed Assets + Net Working Capital)

Return on Invested Capital (ROIC)

• profit generated from all capital providers

• measures how efficiently a company generates after-tax operating profit from capital invested by both debt and equityholders

• = NOPAT/Invested Capital

Gross Margin

• Profit after COGS, before other expenses

• = Gross Profit/Revenue x 100

  • (Gross Profit = Revenue - COGS)

EBITDA Margin

• operating cash flow as % of revenue

• = EBITDA/Revenue

EBIT Margin (Operating Margin)

• profit from operations as % of revenue

• = EBIT/Revenue

EBT Margin

• pre-tax profit as % of revenue

• = EBT/Revenue

Net Profit Margin

• net income as % of revenue

• = Net Income/Revenue

  • (Net Income = Revenue - All Expenses)

  • (All Expenses = COGS + Operating Expenses + Interest + Taxes + etc.)

Effective Tax Rate

• average rate a company pays in taxes on their taxable income

• = Tax/EBT

Tax Burden

• measures portion of pre-tax income a company keeps after paying taxes

• = Net Income/EBT

Effective Interest Rate

• true annual cost of borrowing

• = Interest Expense/Total Interest Bearing Liabilities

Interest Bearing Liabilities

• Borrowed funds that accrue interest over time

  • ex. short term and long term debt including notes payable

Interest Burden

• measures proportion of a company's pre-tax earnings retained after paying interest

• = EBT/EBIT

Asset Turnover Ratio

• revenue generated per dollar of assets

• measures how efficiently a company uses all assets to produce sales

• = Revenue/Avg. Total Assets

  • Avg. Total Assets = (Begin Total Assets + End Total Assets)/2

Capital Asset Turnover Ratio

• revenue generated per dollar of capital assets (PP&E)

• measures how efficiently a company uses its long-term capital assets to produce sales

• = Revenue/Avg. Net Capital Assets (PP&E)

  • Avg. Net Capital Assets = (Begin Net PP&E + End Net PP&E)/2

PP&E Turnover Ratio

• revenue generated per dollar of PP&E

• measures how efficiently a company strictly uses its PP&E to generate sales

• = Revenue/Avg. Net PP&E

Cash Turnover Ratio

• revenue generated per dollar of cash and cash equivalents

• measures how efficiently a company uses its cash to generate revenue

• = Revenue/Cash

Cash Days

• average number of days it takes a company to turn its cash investments into revenue

• measures how many days a company can contribute to operate using only its available cash and cash equivalents

• = Cash/Revenue x 365

A/R (Receivables) Turnover Ratio

• efficiency of collections

• measures how efficiently a company collects payments from its customers

• = Revenue/Accounts Receivable

A/R Days (Day Sales Outstanding, DSO)

• average days to collect payments

• measures the average number of days it takes a company to collect payments after a sale

• = Accounts Receivable/Revenue x 365

• Forecast Receivables = A/R Days x Revenue/365

Inventory Turnover Ratio

• how quickly inventory is sold

• measures how many times company sells and replaces its inventory over a specific period

• = COGS/Inventory

Inventory Days (Days Inventory Outstanding, DIO)

• days inventory is held

• measures average number of days a company holds inventory before selling it

• = Inventory/COGS x 365

• Forecast Inventory = Inventory Days x COGS/365

A/P Turnover Ratio

• speed of paying suppliers

• measures how quickly a company pays off its suppliers

• = COGS/Accounts Payable

A/P Days (Days Payable Outstanding, DPO)

• average days to pay vendors

• measures average number of days a company takes to pay its suppliers

• = Accounts Payable/COGS x 365

• Forecast A/P = A/P Days x COGS/365

Debt-to-Equity Ratio

• compares a company’s total debt to its shareholder equity

• measures how much debt a company uses to finance its operations relative to shareholders’ equity

• = Total Debt/Equity

Debt-to-EBITDA Ratio

• total debt relative to EBITDA, showing how well EBITDA covers total debt

• measure’s company’s ability to pay off its debt using its annual operating cash flow

• = Interest Bearing Liabilities Only/EBITDA

Net Debt-to-EBITDA

• debt after subtracting cash, relative to EBITDA

• measures company’s leverage by comparing its net debt to its operating earnings

• = (Interest Bearing Liabilities - Cash)/EBITDA

Net Debt

• company’s total interest-bearing debt minus its cash and cash equivalents

• = Interest-Bearing Debt - Cash and Cash Equivalents

• ex. interest-bearing debt:

  • revolving credit lines

  • short-term loans/notes payable

  • current portion of long-term debt

  • long-term loans or bonds payable

EBITDA Coverage Ratio

• how many times EBITDA can cover interest expense

• = EBITDA/Interest Expense

Interest Coverage Ratio

• ability to pay interest from operations

• = EBIT/Interest Expense

Equity Multiplier

• leverage factor in ROE

• measures how much a company’s assets are financed by shareholders’ equity

• = Total Assets/Equity

Current Ratio

• ability to cover short-term liabilities with short-term assets

• = Current Assets/Current Liabilities

Quick Ratio (Acid-Test)

• ability to cover short-term liabilities without inventory

• measures a company’s ability to pay its short-term liabilities using only its most liquid assets minus inventory

• = (Current Assets - Inventory)/Current Liabilities

Cash Ratio

• indicates company’s ability to pay off its current liabilities with only cash and cash equivalents

• = Cash and Equivalents/Current Liabilities

Earnings Per Share (EPS)

• profit per share

• = Net Income/Weighted Avg. Shares Outstanding

Price-to-Earnings (P/E)

• measures how much investors are willing to pay for each dollar of a company’s earnings

• = Share Price/EPS

• = Equity Value/Net Income

Price-to-Book (P/B)

• compares a company’s market value to its book value, showing how much investors are paying for each dollar of net assets

• = Share Price/Book Value per Share

Price-to-Sales (P/S)

• measures how much investors are willing to pay for each dollar of a company’s sales

• = Share Price/Revenue per Share

Dividend Yield

• income return to shareholders

• measures how much a company pays out in dividends each year relative to its stock price

• = Dividends per Share/Share Price

Dividend Payout Ratio

• % of earnings paid as dividends

• = Dividends/Net Income

• = Dividends per Share/Earnings per Share (EPS)

Free Cash Flow Yield

• cash flow return to investors

• measures how much free cash flow a company generates relative to its market value

• = Free Cash Flow/Market Cap

EV/Revenue

• total value of a firm relative to annual revenue

• indicates how much investors are willing to pay per dollar of revenue

EV/EBITDA

• total value of firm relative to cash earnings

• indicates the multiple of EBITDA that investors are willing to pay for a company

• lower ratio typically suggests better value

EV/EBIT

• total value of firm relative to core operating profit before interest and taxes

• indicates how much investors are valuing a company's operating performance before financing and tax effects

EV/FCF

• total value of firm relative to free cash flow

• indicates how much investors are willing to pay per dollar of free cash flow

Enterprise Value (EV)

• total value of a company including both equity and debt and excluding cash

• = market capitalization (equity value) + total debt - cash

Retained Earnings (End)

• portion of company's net income that is retained rather than paid out as dividends

• = Retained Earnings (Begin) + Net Income - Dividends

Coupon Rate

• fixed percentage of the bond’s face value

• tells you how much interest the bond pays annually

  • ex. 5% coupon on a $1000 bond = $50/year

Yield to Maturity (YTM)

• market-based rate of return on the bond if held to maturity

• reflects: current bond price, time to maturity, coupon payments, repayment of face value

  • ex. bond with a 5% coupon may have a YTM of 6.2% if it’s trading at a discount