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Gross Profit
Sales
x 100
x 100
x 100
Net Profit
Total Assets
x 100
x 100
ROE
Net
Income
Equity
Net Income
Net Sales
Net Sales
Equity
This reveals that ROE equals the net profit margin times the
equity turnover, which implies that a firm can improve its
return on equity by either using its equity more efficiently or
becoming more profitable.
A firms equity turnover is affected by its capital structure.
Specifically, a firm can increase its equity turnover by
employing a higher proportion of debt capital. We can see
this effect by considering the following relationship:
Net Sales
Net Sales
Total Assets
Equity
Total Assets
Equity
NetIncom
e
NetSales
NetSales
x
TotalAsset
s
TotalAssets
x
CommonEqui
ty
Operating expenses
Sales
x 100
Current Ratio
This measures the ability of a company to pay its current
liabilities such as accounts payables, short-term notes
payables etc. Current liabilities are used as denominators as
they represent most urgent debts maturing within an
operating cycle or one year which ever is longer. Current
assets, representing most liquid assets are taken as
numerator for meeting those liabilities. The current ratio
can be calculated as follows:
Current Assets
Current Liabilities
Quick Ratio
Quick Ratio or Acid test ratio is similar to the current ratio,
except it provides a more rigorous test of short-term
liquidity of the company. As mentioned earlier, prepaid
expenses, store and spares and inventory may not have
high liquidity. For this reason less liquid current assets are
excluded from the numerator.
Total Debt
Total Assets
Debt to Equity
This is the ratio of total debt, both current and long-term,
and stock holders equity (net assets). This ratio analyzes
the relative proportion of all debt claims to ownership claims
against total assets, and is used as a barometer of debt
exposure.
Total Debt
Shareholders Equity
Debt to Capitalization
This is more refined version of total debt to total assets
ratio, involving only long-term portion of debt in invested
capital. Invested capital is the sum of long-term debt (LTD)
and stockholders equity.
Interest Coverage
This ratio presents the relationship between income before
interest and taxes (or Earnings before interest and taxes,
EBIT) and total interest obligations. Annual earnings are the
basic source for providing debt services and must be
sufficient enough to pay off debt and interest. Changes in
this ratio might signal problems for debt servicing. The ratio
is calculated using the following formula:
Credit Sales
Average Receivables
Inventory Turnover
This shows the relationship of how many times inventory
was converted into sales.
Average Inventory
Cost of Goods Sold / 365
are shown at historical cost and thus the ratio could mislead
the analyst.
Sales
Total Assets
Operating Cycle
The length of time taken from purchases of inputs to
collection of receivables resulting from sales is known as
operating cycle. This is a useful concept as it gives a basic
idea of how long it takes to turn the raw materials into cash.
A company which has a shorter operating cycle has the
capacity to turn raw materials into sales and then into cash
in a relatively shorter period and thus can operate with
minimal working capital.
Cash Cycle
The operating cycle starts from the point of purchases of
inputs irrespective of the actual payment for such
purchases. Cash cycle is the time length between actual
outlay of cash for purchases and collection of receivables
resulting from sales. This is arrived at by subtracting the
time taken to settle the payables from the operating
cycle.
Earnings Yield
Measures the earnings capability of an ordinary share
relative to its market price. i.e. the return generated by each
ordinary share on its current market value. Profitable
companies carry attractive earnings yield.
Total dividend
Total No of Ordinary Shares Outstanding
Dividend Yield
Dividend return per share relative to its market value. This is
calculated in the same manner as earnings yield.
Classification
Ratios
Equation
Profitability
Ratios
Gross Profit
Margin(%)
Operating Profit
Margin(%)
Net Profit
Margin(%)
Return on
Investment (ROI%)
Return on Equity
(ROE%)
Definition
Measures
gross
profitability
with respect
to sales.
Measures
operating
profitability
with respect
to sales.
Measures
overall
profitability
with respect
to sales.
Measures
the overall
effectiveness
in
generating
profits with
the given
investment.
Net Profit
X 100
Shareholder's Equity
Measures
the overall
effectiveness
in
generating
profits with
the given
equity.
Measures
relationship
of other
important
ratios with
the ROE.
Current Assets
Current Liabilities
Measures
ability to
meet current
liabilities with
current
assets.
Measures the
ability to
meet current
liabilities with
liquid current
assets.
Measures the
amount of
cash
generated
from
operation per
each share.
Measures the
firms ability
to generate
cash from
operations to
meet current
liabilities.
Cash Flow to
Total Debt
Ratio
Measures
ability to
cover total
liabilities with
cash flow
from
operations.
Cash Flow to
Long-term
Debt
Measures
ability to
meet debt
obligation.
The Dupont
Analysis
Liquidity
Ratios
Current Ratio
Quick Ratio
Cash Flow
Per Share
Operating
Cash flow
Ratio
Cash Flow to
Interest
Bearing Debt
Financial
Leverage
Ratios
Debt to
Equity
Debt to Total
Assets
Debt to
Capitalisation
Debt
Service
Ratio
Interest
Coverage
Fixed
Financial
Cost Ratio
Cash Flow
Coverage of
Fixed
Financial
Cost
Measures
ability to
meet debt
obligation.
Total Debt
Shareholders Equity
Indicates the
extent of
debt
financing
relative to
equity
financing.
Total Debt
Total Assets
Indicates the
extent of
debt
financing
relative to
total assets.
Indicates the
extent of
debt
financing
relative to
capitalization.
Indicates the
ability to
cover interest
expenses
with the
given level of
earnings.
EarningsBeforeInterest&Tax/Zakat+ELIE
Interest Expense+ELIE
Ability to
cover interest
expenses
plus interest
on lease with
the given
level of
earnings.
CFO+Interest Expense+ELIE
Interest Expense+ELIE
Ability to
cover interest
expenses
plus interest
on lease with
given level of
CFO.
Activity
Ratios
Accounts
Receivables
Collection
Period
Inventory
Turnover
Inventory
Turnover in
Days
Accounts
Payable
Turnover
Period
Operating
Cycle
Measures the
number of
days taken to
collect the
receivables.
Cost of Sales
Average Inventory
Measures
number of
times the
inventory has
been turned
over into
sales.
Average Inventory
Cost of Sales/365
Measures
number of
days the
inventory is
held before
turned into
sales.
Measures
average
number of
days taken to
settle the
creditors.
Measures
length of time
between the
purchase of
supplies and
collection of
cash from
receivable.
Cash Cycle
Asset
Turnover
Market
Ratios
Net Sales
Average Assets
Measures
length of time
between
actual. cashoutlay for
purchases
and collection
from
receivables.
Measures the
efficiency of
generating
sales with the
given asset
base.
Net Income
No of Ordinary Shares Outstanding
Measures
earnings
capability of
an ordinary
share
Measures the
amount the
investors are
willing to pay
for each
dollar of
earnings.
Earnings
Yield
Measures the
earnings
capability of
an ordinary
share relative
its market
value.
Dividend Per
Share
Cash Dividend
No of Ordinary Shares Outstanding
Measures the
dividend
return earned
by a share
Earnings Per
Share
Price
Earnings
Ratio - (PER)
Measures the
dividend
earned by a
share relative
its market
value.
Dividend
Pay-out Ratio
Indicates the
percentage of
earnings paid
out as
dividend.
Book Value
Per Share
Measures
equity on per
share basis.
Measures
market price
of share
relative to
book value.
Dividend
Yield
Price to Book
Value Ratio
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