Useful ratios Flashcards
What is the price/earning ratio?
PER = P/EPS = Cap/NI
P = price EPS = Earnings per Share Cap = number of shares NI = Net income
Measure of value increase of the share: The higher the PER is, the more investors agree to pay - they anticipate a larger profit growth than the average security.
What is the Market-to-book ratio?
MTB=(Market value)/(Book value)=(Market Capitalization)/(Equity value)=(n∗P)/(∑Assets−∑debts)
MTB > 1, the market value of the firm is greater than its book value - investors expect a strong value creation of the company.
If it is lower than 1, it is a “disaster”, the company is destroying itself. The company should have a higher value than just the assets in its books.
Current ratio
Current assets/current liabilities
Liquidation ratio that measures if a company has enough assets to meet its short-term liabilities.
Leverage ratio
Debt/equity
Shows the proportion of debt compared to equity. If the leverage ratio is too high with the WCR, it is a bad sign.
Receivable/payable turnover
Receivable turnover = receivables/sales*(1-tax)
Payable turnover = payable/purchases*(1-tax)
The receivable turnover should preferably be smaller than the payable turnover. Otherwise the company could be in trouble with meeting short-term obligations.
Asset turnover
net sales/average total assets
Measures how efficient a company generates revenues from its sales.
Gross profit margin
Gross income (revenues - cost of goods sold)/net revenue
How much of the revenue is used to pay for the cost of goods sold?
Net profit margin
net income/net revenue
It measures a firm’s ability to translate sales into earnings for shareholders.
ROA & ROE
High ROA: company is able to generate revenues from its assets.
ROE: This ratio measures the level of income attributed to shareholders against the investment that shareholders put into the firm. Financial leverage magnifies the impact of earnings on ROE in both good and bad years.
Big difference between ROA and ROE = likely that there are high levels of debt.
What is the ratios of EBITDA distribution?
DA/EBITDA
Interests/EBITDA
Shows how sufficiently a company can meet its obligations from production.
How is turnover calculated?
Sales/NOA
