This is used by shareholders or investors to calculate the return on their investments, and to make good decisions about which shares to buy...
List of Investment Ratios and Formulas:
1. Dividend cover = Profit after tax / dividends
2. Dividend yield = ( Dividend per share/ Market price per share ) * 100 %
3. Earnings per share (EPS) = Profit available to equity shareholders / Number ofequity shares
4. Price earnings ratio (P/E) = Market price per share / Earnings per share
5. Price to sales ratio = Market price per share / Sales per share
6. Price earnings growth (PEG) ratio = Price per earnings / Annual EPS growth
7. Price to book value (PBV) = Market price per share / Balance sheet price per share
8. Payout Ratio = Dividend per share / EPS
Examples:
1) Camry Ltd made a net profit of $80,000 that is available to ordinaryshareholders, and the dividend declared is $20,000, then:
Dividend cover = 80,000 / 20,000 = 4 times
2) An investor bought a share at $6.00 and he received a dividend of $0.30 on it, then:
Dividend yield = (0.30 / 6.00) * 100 % = 5 %
3) Company ABC has an annual earning of $140,000 dollars. Total dividends of $70,000 are to be paid out, and the company has 350,000 outstanding shares.
Solution:
Earnings per share (EPS) = $140,000 / 350,000 = $0.40
Dividend per share = 70,000 / 350,000 = $0.20
The dividend payout ratio = 0.20 / 0.40 = 50%
4) Sports Ltd has ordinary share capital of 200,000 shares at $1 each. It made a net profit of $400,000 that is available to the ordinary shareholders. The market price of a share is $6.00.
Then:
EPS = $400,000 / 200,000 = $2 per share
P/E ratio = $6 / $2 = 3
Financial Leverage Ratio Analysis
This is used to assess the financial position of a company in terms of its financial stability. It gives an indication of the firm's ability in repaying its long-term debts...
Definition: Financial Leverage Ratio (also called long-term solvency ratio) is used to measure the firm's ability to repay its long-term debts. It gives an indication of the long-term solvency of the firm.
List of Financial Leverage Ratios and Formulas:
1) Debt to Equity = Total Debt / Total Equity
2) Total Debts to Assets = Total Liabilities / Total Assets
3) Interest Coverage Ratio = Earnings Before Interest and Taxes / Interest Charges
4) Debt service coverage ratio = Net Operating Income / Total Debt Service
5) Capitalization Ratio = Long-term Debt / (Long-term debt + Shareholder equity)
Learn how to calculate financial leverage ratio with the following examples:
Example 1:
CK Ltd has total liabilities of $700,000 and total stockholders' equity of $380,000, then the debt/capital ratio is: 700,000 / (700,000 + 380,000) = 700,000 / 1,080,000 = 0.6481 = 64.81%
Example 2:
Saint Ltd. is looking at an investment property with a net operating income of $87,000 and an annual debt service of $58,000. The debt service coverage ratio for this property = 87,000 / 58,000 = 1.5
Example 3:
Jimmy plc has total sales revenue of $99,000 for the year. It has cost sales $9,000 and operating expenses of $5,000. The company's interest expense for the year is $25,000.
Then,
Earnings Before Interest and Taxes = Sales – Cost of sales – Operating expenses
EBIT = $99,000 - $9,000 - $5,000
EBIT = $85,000
Interest Coverage Ratio = $85,000/$25,000 = 3.4 times
Example 4:
Peters Ltd has the following information:
Creditors $2,000
Loan $38,000
Buildings $60,500
Debtors $7,000
Bank $5,000
Stocks $4,500
Then, the Total Liabilities = 2,000 + 38,000 = $40,000
Total Assets = 60,500 + 7,000 + 5,000 + 4,500 = $77,000
Total Debts to Assets = 40,000 / 77,000 = 0.519
Profitability Ratio Analysis & Example
This is used to assess the profitability of a business in relation to its past performance, or in relation to other companies in the same industry...
List of Profitability Ratios and Formulas:
1. Gross Profit ratio = (Gross profit / Net sales) * 100 %
2. Net Profit ratio = (Net profit / Net sales) * 100 %
3. Operating profit margin = Operating income / Net sales
4. Return on Capital Employed = (Profit before interest / Capital employed) * 100 %
5. Return on Equity (ROE) = Net income / Average shareholders equity
6. Return on Assets (ROA) = Net income / Total assets
7. Cash flow return on investment (CFROI) = Cash flow / Market recapitalisation
8. Risk adjusted return on capital (RAROC) = Expected return / Economic capital
9. Return on net assets = Net income / Net assets
Example:
Calculate the profitability ratios, given the following figures:
Stock at the start of the year: $10,000
Stock at the end of the year: $6,000
Sales: $18,000
Sales returns: $3,000
Purchases: $2,000
Overhead expenses: $3,000
Capital at start of year: $17,000
Capital at end of year: $15,000
Solution:
Net sales = $18,000 - $3,000 = $15,000
Cost of sales = Stock at start + purchases - Stock at end = 10,000 + 2,000 - 6,000 = $6,000
Gross profit = Net sales - Cost of sales = $15,000 - $6,000 = $11,000
Gross profit ratio = (11,000 / 15,000 ) * 100% = 73.33 %
Net profit = Gross profit - overhead expenses = 11,000 - 3,000 = $8,000
Net profit ratio = (8,000 / 15,000 ) * 100% = 53.33 %
Average capital employed = 1/2 (Capital at start + Capital at end) = 1/2 (17,000+15,000) = $16,000
ROCE = (8,000 / 16,000) * 100% = 50%
Efficiency Ratio Analysis & Example
This is used to analyze how efficiently the firm uses and controls its assets and liabilities internally...
Definition: Efficiency Ratios (also known as Activity ratios) are used to measure the effectiveness of the firm's use of resources.
List of Efficiency Ratios and Formula:
1. Average Collection Period = (Average Trade Debtors / Credit Sales) * No. of Days
2. Average Payment Period = (Average Trade Creditors / Credit Purchases) * No. of Days
3. Inventory Turnover Ratio = Cost of goods sold / Average inventory held
4. Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors
5. Total Assets Turnover = Net Sales / Total Assets
6. Degree of Operating Leverage = % change in EBIT / % change in Sales
7. Creditors Turnover Ratio = Net Credit Purchases / Average Payable
8. Days Sales Outstanding Ratio = Accounts Receivable / Average sales per day
9. Working capital turnover Ratio = Cost of sales / Average net working capital
10. Current Asset Turnover Ratio = Cost of goods sold / Current assets
11. Stock Turnover Period = (Average stock / Cost of goods sold) * No. of Days
12. Cash Cycle = Stock Turnover Period + Average Collection Period - AveragePayment Period
Example:
Emily Ltd has the following information:
Trade debtors $100,000
Trade creditors $80,000
Credit sales $300,000
Credit purchases $120,00
Cost of sales $70,000
Opening stock $60,000
Closing stock $20,000
Bank $66,000
Calculate the relevant Efficiency Ratios.
Solution:
Average Collection Period = (100,000 / 300,000) * 365 = 121.7 days
Average Payment Period = (80,000 / 120,000) * 365 = 243.3 days
Current Asset Turnover = 70,000 / (100,000 + 20,000 + 66,000) = 0.38
Average stock = (60,000 + 20,000) / 2 = $40,000
Stock Turnover Period = (40,000 / 70,000) * 365 = 208.6 days
Cash Cycle = 208.6 + 121.7 - 243.3 = 87 days
Liquidity Ratio Analysis & Example
This is used to measure the ability of the firm in meeting its short-term liabilities...
Definition: Liquidity ratios provide a general estimate of solvency of a company.
List of Common Liquidity ratios and Formulas:
1) Current ratio (also known as working capital ratio)
= Current Assets / Current Liabilities
2) Quick ratio, in times (also known as acid test ratio or quick assets ratio)
= (Current Assets - Stock) / Current Liabilities
3) Interest Coverage = Profit Before Tax / Interest Charge
4) Gearing ratio = Long Term Liabilities / Equity Shareholders' Funds
5) Cash Ratio = Cash / Current Liabilities
6) Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities
Example:
Calculate the working capital, acid test and gearing ratios, given the following figures:
Debtors: $2,000
Creditors: $5,000
Bank: $11,000
Cash: $1,000
Closing stock: $6,000
Opening stock: $7,000
Total Capital and Reserves: $25,000
Long term loan: $15,000
Solution:
Current assets = debtors + bank + cash + closing stock = 2000 + 11000 + 1000 + 6000 = $20,000
Working capital ratio = 20,000 / 5,000 = 4 (This means that current assets are 4 times current liabilities)
Acid test ratio = (20,000 - 6,000) / 5,000 = 2.8 (This means that current assets in liquid form are 2.8 times current liabilities)
Equity Shareholders' Funds = Total Capital and Reserves + Long term Liabilities = 25000 + 15000 = $40,000
Gearing ratio = 15,000 / 40,000 = 0.375
http://forum.srilankaequity.com/t14598-financial-ratio-analysis-part-1#94176
Source:financelearners