FMGT 2371 - ratios and formulas

sustainable growth rate

retention rate = NI-dividends/NI or 1-dividend payout

tax rate

tax expense/income before tax

dividend payout

dividends/NI

retained earnings

beginning RE + NI - dividends

quick ratio

(current assets - inv)/current liabilities

→ removes inventory (ability to pay debt without selling)

→ >0.5 is good

current ratio

current assets/current liabilities

→ ability to pay short-term debt with short-term assets

→ more than 1 is good

debt ratio

total debt/total assets

→ should be less than 0.7

→ % of assets funded by debt

TIE ratio

EBIT/int expense

→ min 2x

gross profit margin ratio

(revenue-COGS)/revenue

→ less than 0.1 is low

→ 0.39 and more is high

→ efficiency in purchasing

ROE

net income/share holder’s equity

→ profits generated for shareholders

→ >0.08

ROA

net income/avg total assets

→ how efficiently management uses assets to generate profit

→ >0.03 IS GOOD

net profit margin

net income/revenue

→ earnings per dollar after expenses, tax, and interest

→ 0.03< is good

operating margin

EBIT/revenue

inv turnover

COGS/avg turnover

→ 4x

a/r turnover

net sales/avg a/r

→ > 60+ is poor

a/p turnover

supply purchases/avg a/p

→ 60+ is poor

dividend yield

dividend per share/price per share

→ return from divdends only

EBITDA

enterprise value/EBITA

P/E ratio

share price/earnings per share

→ how much investors pay for $1 of earnings

asset turnover

net sales/avg total assets

→ >0.5 is good

ratio categories and what they mean

• liquidity → can you survive the next 12 months

• solvency → can you survive long-term?

• profitability → can you make money?

• efficiency → how well we use assets?

• market → how does the market see you?

♦ ideally, strong solvency ratios can solve liquidity ratios but not the other way around

liquidity ratios

• quick ratio

• current ratio

solvency ratio

• debt ratio

• tie ratio

profitability ratio

• margins (gross, profit, operating)

• returns (ROE, ROA) - return on ___

efficiency ratio

• turnovers (A/R, inventory, A/P)

market ratios

• dividend yield

• P/E ratio