Finance Ratios

P/E ratio

multiplier applied to earnings per share to determine current value of common stock

Factors that influence P/E

• Earnings and sales growth of firm

• Risk

• Debt–equity structure of firm

• Dividend payment policy 

P/E represent how much you're paying for a $ dollars worth of earnings

Balance sheet

• Indicates what a firm owns and how assets are financed in form of liabilities or equity (Picture of the firm at point in time)

• Current assets turn into cash within the year

• Fixed assets are long term

Stockholders Equity

• represents total contribution and ownership interest of preferred and common stockholders

  • Preferred stock, common stock, capital paid in excess of par, retained earnings

Statement of cash flows

• Emphasizes nature of cash flow to firm operations

• Measures the change in cash during an accounting period

Direct method

for cash flow; every item on income statement adjusted from accrual to cash accounting

Indirect method

(popular); net income represents starting point, adjustments are made to convert net income to ash flows from operations

Depreciation

Non cash expense; systematic and rational process of distributing the cost of an asset over the economic life of the asset

Profitability ratios

(measures the companies ability to generate profits from its resources)

• Profit margin, return on assets, return on equity

Activity ratios

(measures how efficiently a company utilizes its assets to generate cash

• Receivables turnover, average collection period, inventory turnover, total asset turnover

• Numerator is from income statement and denominator is from balance sheet usually

Liquidity ratios

(measures a company's ability to meet its short term obligations

• Current ratio and quick ratio

Debt-utilization ratios

• Debt to total assets, debt to equity, times interest earned

Profit Margin =

Net Income ÷ Sales

Return on Assets (ROA) =

• Net Income ÷ Total Assets

Return on Equity (ROE) =

• Net Income ÷ Shareholders' Equity

Receivables Turnover =

• Sales ÷ Accounts Receivable

Average Collection Period =

• 365 ÷ Receivables Turnover

Inventory Turnover =

• Cost of Goods Sold (COGS) ÷ Inventory

Fixed Asset Turnover =

• Sales ÷ Net Fixed Assets

Total Asset Turnover =

• Sales ÷ Total Assets

Current Ratio =

Current Assets ÷ Current Liabilities

Quick Ratio =

(Current Assets - Inventory) ÷ Current Liabilities

Debt to Total Assets =

• Total Debt ÷ Total Assets

Times Interest Earned =

• EBIT ÷ Interest Expense

Fixed Charge Coverage =

(EBIT + Lease Payments) ÷ (Interest Expense + Lease Payments)