Item Year 2018 Year 2017 Year 2016 Year 2015

Horizontal Analysis

Percent ((Current Year -

Amount (Current Year - Base Base Year)/Base Amount (Current Year - Base
Year) (e.g. 2018) Year)*100 Year) (e.g. 2017)
 Vertical Analysis

Percent (Item/Total Percent (Item/Total Percent (Item/Total

Percent ((Current Year - Assets or Total Assets or Total Assets or Total
Base Year)/Base Liabilites&Equity)*10 Liabilites&Equity)*10 Liabilites&Equity)*10
Year)*100 0 (e.g 2018) 0 (e.g 2017) 0 (e.g 2016)
Item Year 2018
REVENUES
Gaming
Hotel, food and beverage
Retail and others
Total Revenues
OPERATING COSTS AND EXPENSES
GAIN/LOSS FROM OPERATIONS

OTHER INCOME (CHARGES) - NET

Income from ceded leased property rights
Interest and financial charges
Interest income
Provision for doubtful accounts
Gain on disposal of property and equipment
Foreign exchange gains - net
Others
Total Other Income
LOSS BEFORE INCOME TAX

PROVISION FOR (BENEFIT FROM) INCOME TAX

Current
Defferred
Total Provision for Income Tax
NET LOSS

OTHER COMPREHENSIVE GAIN, NET OF TAX

Item that will not be reclassified to profit or loss in
subsequent period
Remeasurement gain on retirement benefit liability

TOTAL COMPREHENSIVE LOSS

 TIGER RESORT, LEISURE AND ENTERTAINME
Doing business under the name and style of Okada Ma
STATEMENT OF FINANCIAL POSITION
As of December 31, 2016 / 2017 / 2018
(Amounts in Millions of Philippine Pesos)

Horizon

Amount (Current Year - Base

Year 2017 Year 2016 Year 2015 Year) (e.g. 2018)
RE AND ENTERTAINMENT, INC.
he name and style of Okada Manila
OF FINANCIAL POSITION
ber 31, 2016 / 2017 / 2018
illions of Philippine Pesos)

Horizontal Analysis Vertical An

Percent ((Current Year - Percent ((Current Year - Percent (Item/Total
Base Year)/Base Amount (Current Year - Base Base Year)/Base Revenue)*100 (e.g
Year)*100 Year) (e.g. 2017) Year)*100 2018)
 Vertical Analysis
Percent (Item/Total Percent (Item/Total
Revenue)*100 (e.g Revenue)*100 (e.g
2017) 2016)
Notes
Operating Revenue or revenue
Operating Income -> (- Operating Expense)
COGS is not available, use OPEX
Trade Payables or Account Payables
"in Days" -> whole number values
Debt -> long term loans, lease liabilities, short-term loans
Book Value Per Share -> currency -> net loss+tax+Interest Expense or Interest and financial
charges+other income
Gross Profit Margin -> no COGS -> NA
Operating Margin -> %
Always ignore the comprehensive loss or anything below the net loss
CM -> no variable cost -> NA
For Debt - you can use either 1) Total Liabilities or (2) Interest-bearing liabilities and lease liability
(short-term and long-term loans + lease liability)
Debt -> Short term Debt +Long-term Debt+Leases
EBIT = Net Profit-interest expense-income tax expense
Fixed Charge Coverage -> ((Earnings before interest and taxes) + Lease expense) ÷ (Interest expense + Lease expense)
e + Lease expense)
Ratios Definition
Ability of the firm to meet its short term
Liquidity obligations

Current Ratio Current Assets/Current Liabilities

Quick Ratio Quick Assets/Current Liabilities

Quick Assets Cash+Marketable Securities+Accounts Receivables

Ability of the firm to effectively manage its

Activity investment in assets

Asset Turnover Operating Revenue/Average Total Asset

Receivables Turnover Operating Revenue/Average Accounts Receivables

Days' receivables or Average Average Accounts Receivables/Operating
collection period Revenues*365

Inventory Turnover Cost of Goods Sold/Average Inventory

Days in Inventory 365/Inventory Turnover 365

Days' Payables Accounts Payables/Cost of Goods Sold*365

 The extent to which the firm relies on debt
Financial Leverage financing

Debt Ratio Total Debt/ Total Assets

Debt to Equity Ratio Debt/Total Equity

Equity Multiplier Total Assets/Total Equity

Earnings before Interest and Taxes (EBIT)/Interest

Interest Coverage Expense

Earnings before Fixed Charges and Taxes/Fixed

Fixed Charge Coverage Charges

Profitability The extent to which the firm is profitable

Net Profit Margin Net Income/Revenue

Gross Profit Margin Gross Profit/Revenue

Contribution Margin Operating Revenue - Variable Costs

Operating Leverage (Change in EBIT/EBIT)*(Sales/Change in Sales)
Operating Margin Operating Income / Operating Revenues

Return on Assets (ROA)

Net Income/Average Total Assets

Profit Margin*Asset Turnover #DIV/0! #DIV/0!
(Net Income/Operating Revenue)*(Operating
Revenue/Average Assets)

Economic Value Added ROA - Weighted Average Cost of Capital (WACC)

Net Income/Average Stockholders' Equity

ROE

Profit Margin*Asset Turnover*Equity Multiplier #DIV/0! #DIV/0!

(Net Income/Operating Revenue)*(Operating

Revenue/Average Assets)*(Average
Assets/Average Stockholders' Equity)
DuPont Model
ROE
ROA
Asset TurnOver
Net Margin
Equity Multiplier

Value Value of the firm

Earnings per Share (EPS) Earnings Available to Common Shareholders/Wtd

Average no. of Common Shares O/S
(Net Income - Preferred Dividends)/Wtd. Average
no. of Common Shares O/S

Price to Earnings (P/E) Market Price Per Share/Earnings Per Share

Dividend Yield Dividend per share/market price per share

Market to Book Value Market Price Per Share/Book Value Per Share
Formula Result

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!
 365 #DIV/0!

#DIV/0!

#DIV/0!

365 #DIV/0!
#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!
#DIV/0!

#DIV/0!

0
 #DIV/0!
#DIV/0!

#DIV/0!
#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0! #DIV/0!

#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!
Interpretation

A ratio under 1 indicates that the company’s debts due in a year or less are greater than its assets (cash or
other short-term assets expected to be converted to cash within a year or less.)

On the other hand, in theory, the higher the current ratio, the more capable a company is of paying its
obligations because it has a larger proportion of short-term asset value relative to the value of its short-term
liabilities. However, while a high ratio, say over 3, could indicate the company can cover its current liabilities
three times, it may indicate that it's not using its current assets efficiently, is not securing financing very well,
or is not managing its working capital.

A result of 1 is considered to be the normal quick ratio, as it indicates that the company is fully equipped
with exactly enough assets to be instantly liquidated to pay off its current liabilities. A company that has a
quick ratio of less than 1 may not be able to fully pay off its current liabilities in the short term, while a
company having a quick ratio higher than 1 can instantly get rid of its current liabilities. For instance, a quick
ratio of 1.5 indicates that the company has $1.50 of liquid assets available to cover each $1 of its current
liabilities.

The asset turnover ratio is an efficiency ratio that measures a company’s ability to generate sales from its
assets by comparing net sales with average total assets. In other words, this ratio shows how efficiently a
company can use its assets to generate sales. This ratio measures how efficiently a firm uses its assets to
generate sales, so a higher ratio is always more favorable. Higher turnover ratios mean the company is using
its assets more efficiently. Lower ratios mean that the company isn’t using its assets efficiently and most
likely have management or production problems.

For instance, a ratio of 1 means that the net sales of a company equals the average total assets for the year.
In other words, the company is generating 1 dollar of sales for every dollar invested in assets.

The ratio is used to evaluate the ability of a company to efficiently issue credit to its customers and collect
funds from them in a timely manner. A high turnover ratio indicates a combination of a conservative credit
policy and an aggressive collections department, as well as a number of high-quality customers. A low
turnover ratio represents an opportunity to collect excessively old accounts receivable that are unnecessarily
tying up working capital. Low receivable turnover may be caused by a loose or nonexistent credit policy, an
inadequate collections function, and/or a large proportion of customers having financial difficulties. It is also
quite likely that a low turnover level indicates an excessive amount of bad debt. It is useful to track accounts
receivable turnover on a trend line in order to see if turnover is slowing down; if so, an increase in funding
for the collections staff may be required, or at least a review of why turnover is worsening.
An increase in the average collection period can be indicative of any of the following conditions:

Looser credit policy. Management has decided to grant more credit to customers, perhaps in an effort to
increase sales. This may also mean that certain customers are being allowed a longer period of time before
they must pay for outstanding invoices. This is especially common when a small business wants to sell to a
large retail chain, which can promise a large sales boost in exchange for long payment terms.
Worsening economy. General economic conditions could be impacting customer cash flows, requiring them
to delay payments to their suppliers.
Reduced collection efforts. There may be a decline in the funding for the collections department or an
increase in the staff turnover of this department. In either case, less attention is paid to collections, resulting
in an increase in the amount of receivables outstanding.
A decrease in the average collection period can be indicative of any of the following conditions:

Tighter credit policy. Management may restrict the granting of credit to customers for a number of reasons,
such as in anticipation of a decline in economic conditions or not having enough working capital to support
the current level of accounts receivable.
Reduced terms. The company may have imposed shorter payment terms on its customers.
Increased collection efforts. Management may have decided to increase the staffing and technology support
of the collections department, which should result in a reduction in the amount of overdue accounts
receivable.

When there is a low rate of inventory turnover, this implies that a business may have a flawed purchasing
system that bought too many goods, or that stocks were increased in anticipation of sales that did not occur.
In both cases, there is a high risk of inventory aging, in which case it becomes obsolete and has little residual
value.

When there is a high rate of inventory turnover, this implies that the purchasing function is tightly managed.
However, it may also mean that a business does not have the cash reserves to maintain normal inventory
levels, and so is turning away prospective sales. The latter scenario is most likely when the amount of debt is
unusually high and there are few cash reserves.

A small number of days' sales in inventory indicates that a company is more efficient at selling off its
inventory, while a large number indicates that it may have invested too much in inventory, and may even
have obsolete inventory on hand. However, a large number may also mean that management has decided to
maintain high inventory levels in order to achieve high order fulfillment rates.

The cash conversion cycle measures the time period required to convert resources into cash. The intent
behind the measurement is to determine how long it takes for funds paid to buy resources to be converted
into cash by selling the resulting goods and being paid by customers. A short conversion cycle is considered
highly desirable, since it means that a business can be operated with a reduced amount of cash. A company
with a shorter conversion cycle than its peer group probably has reached this point due to a continual review
of the entire process over a long period of time. At a minimum, a responsible manager may want to track the
conversion cycle on a trend line, and take action whenever the cycle indicates that it is taking longer to
convert invested funds back into cash.

The cycle is also closely monitored in smaller organizations that have minimal amounts of equity or debt
funding. These businesses have so little excess cash that they must be mindful of how their cash is being
used. This is a particular problem for nonprofit entities, since they usually have small cash reserves.
The debt ratio measures the proportion of assets paid for with debt. One can use the ratio to reach
conclusions about the solvency of a business. A high ratio implies that the bulk of company financing is
coming from debt; this is a risky financial structure, since the borrower is at risk of not being able to pay for
the associated interest expense or paying back the principal. A low debt ratio reflects a conservative
financing strategy of using only equity to pay for assets.

The debt to equity ratio measures the riskiness of a company's financial structure by comparing its total debt
to its total equity. The ratio reveals the relative proportions of debt and equity financing that a business
employs. It is closely monitored by lenders and creditors, since it can provide early warning that an
organization is so overwhelmed by debt that it is unable to meet its payment obligations. This is also a
funding issue. For example, the owners of a business may not want to contribute any more cash to the
company, so they acquire more debt to address the cash shortfall. Or, a company may use debt to buy back
shares, thereby increasing the return on investment to the remaining shareholders.

When a business has a high debt to equity ratio, it has imposed on itself a large block of fixed cost in the
form of interest expense, which increases its breakeven point. This situation means that it takes more sales
for the firm to earn a profit, so that its earnings will be more volatile than would have been the case without
the debt.

The equity multiplier is the ratio of a company's total assets to its stockholders' equity. The ratio is intended
to measure the extent to which equity is used to pay for all types of company assets. If the ratio is high, it
implies that assets are being funded with a high proportion of debt. Conversely, if the ratio is low, it implies
that management is either avoiding the use of debt or the company is unable to obtain debt from
prospective lenders.

The interest coverage ratio measures the ability of a company to pay the interest on its outstanding debt.
This measurement is used by creditors, lenders, and investors to determine the risk of lending funds to a
company. A high ratio indicates that a company can pay for its interest expense several times over, while a
low ratio is a strong indicator that a company may default on its loan payments.

The fixed charge coverage ratio is used to examine the extent to which fixed costs consume the cash flow of
a business. In effect, it shows how many times a business can pay for its fixed costs with its earnings before
interest and taxes. The ratio is most commonly applied when a company has incurred a large amount of debt
and must make ongoing interest payments. If the resulting ratio is low, it is a strong indicator that any
subsequent drop in the profits of a business may bring about its failure. Conversely, a high ratio indicates that
a business can safely use more debt to fund its growth. The ratio is typically used by lenders evaluating an
existing or prospective borrower.
The net profit margin is equal to how much net income or profit is generated as a percentage of revenue. Net
profit margin is the ratio of net profits to revenues for a company or business segment. Net profit margin is
typically expressed as a percentage but can also be represented in decimal form. The net profit margin
illustrates how much of each dollar in revenue collected by a company translates into profit. Improvement
An increase in profit margin compared to the previous period's margin signals an improvement in both
operational efficiency and profitability. For example, a current margin of 10 percent compared to last
month's margin of 9.5 percent means the company improved its profits and efficiency by .5 percent. A
margin higher than those of other companies or higher than the industry average means your business
performed better than those companies during that period.

Decline
A decline in net profit margin means a decline in performance and profitability levels. Net profit margin is
determined by the difference between total revenue and total expense. The margin goes up if the difference
between revenue and expense becomes bigger, but it will decline once the difference between these two
accounts becomes smaller. A lower margin compared to other margins is indicative of a lower performance
level.

No Change
A margin that stays the same means there is no improvement or decline in performance level. Sales may rise
and expenses may go down, but no improvement or decline in performance has been achieved if the same
margin is generated from one period to the next. It is possible that even with more resources in terms of
labor, time and money, your ability to generate profit this period is still at the same level as last period's.
Gross profit margin is the percentage of your periodic revenue that you convert to gross profit. When a
company makes more money on each product it sells, it has a higher gross profit margin. If it starts to get
less per product sold, its gross profit margin decreases.

The contribution margin ratio is the difference between a company's sales and variable expenses, expressed
as a percentage. The total margin generated by an entity represents the total earnings available to pay for
fixed expenses and generate a profit. When used on an individual unit sale, the ratio expresses the
proportion of profit generated on that specific sale.

The contribution margin should be relatively high, since it must be sufficient to also cover fixed expenses and
administrative overhead. Also, the measure is useful for determining whether to allow a lower price in
special pricing situations. If the contribution margin ratio is excessively low or negative, it would be unwise to
continue selling a product at that price point, since the company would have considerable difficulty earning a
profit over the long term. However, there are cases where it may be acceptable to sell a package of goods
and/or services where individual items within the package have a negative contribution margin, as long as
the contribution margin for the entire package is positive. The ratio is also useful for determining the profits
that will arise from various sales levels.
Operating leverage measures a company’s fixed costs as a percentage of its total costs. It is used to evaluate
the breakeven point of a business, as well as the likely profit levels on individual sales. The following two
scenarios describe an organization having high operating leverage and low operating leverage.

High operating leverage. A large proportion of the company’s costs are fixed costs. In this case, the firm earns
a large profit on each incremental sale, but must attain sufficient sales volume to cover its substantial fixed
costs. If it can do so, then the entity will earn a major profit on all sales after it has paid for its fixed costs.
However, earnings will be more sensitive to changes in sales volume.

Low operating leverage. A large proportion of the company’s sales are variable costs, so it only incurs these
costs when there is a sale. In this case, the firm earns a smaller profit on each incremental sale, but does not
have to generate much sales volume in order to cover its lower fixed costs. It is easier for this type of
company to earn a profit at low sales levels, but it does not earn outsized profits if it can generate additional
sales.

The return on assets compares the net earnings of a business to its total assets. It provides an estimate of
the efficiency of management in using assets to create a profit, and so is considered a key tool for evaluating
management performance. The return on assets ratio measures how effectively a company can earn a
return on its investment in assets. In other words, ROA shows how efficiently a company can convert the
money used to purchase assets into net income or profits.

Since all assets are either funded by equity or debt, some investors try to disregard the costs of acquiring the
assets in the return calculation by adding back interest expense in the formula.

It only makes sense that a higher ratio is more favorable to investors because it shows that the company is
more effectively managing its assets to produce greater amounts of net income.

Economic value added is the incremental difference in the rate of return over a company's cost of capital. In
essence, it is the value generated from funds invested in a business. If the economic value added
measurement turns out to be negative, this means that management is destroying the value of the funds
invested in a business. It is essential to review all of the components of this measurement to see which areas
of a business can be adjusted to create a higher level of economic value added. If the total economic value
added remains negative despite all attempts to enhance it, the business should be shut down, so that the
underlying funding can be reinvested elsewhere.

The return on equity ratio reveals the amount of return earned on the shareholders' equity invested in a
business. The measurement is commonly used by investors to evaluate current and prospective business
investments. This return can be improved when a business buys back its own stock from investors, or by
using more debt and less equity to fund its operations.

The first thing that we need to think about in order to calculate and analyze Return on Equity (ROE) is Net
Profit. Net Profit here is the profit after tax that entity generates for the period of time.

Net profit arrived after deduction many significant importance expenses. Those expenses are included Cost
of Goods Sold, Operating Expenses, Interest Expenses as well as tax expenses.
The earnings per share ratio (EPS ratio) measures the amount of a company's net income that is theoretically
available for payment to the holders of its common stock. A company with a high earnings per share ratio is
capable of generating a significant dividend for investors, or it may plow the funds back into its business for
more growth; in either case, a high ratio indicates a potentially worthwhile investment, depending on the
market price of the stock.

The price earnings ratio compares the market price of a company's stock to its earnings per share. This ratio
reveals the multiple of earnings that the investment community is willing to pay to own a company's stock. A
very high multiple indicates that investors believe the company's earnings will improve dramatically, while a
low multiple indicates the reverse. If the ratio is already high, then there is little chance for the stock price to
move even higher, so there is significant risk that the share price will slide lower in the future; If a company is
currently reporting a loss, then it has no price earnings ratio at all.

The dividend yield ratio shows the proportion of dividends that a company pays out in comparison to the
market price of its stock. Thus, the dividend yield ratio is the return on investment to an investor if the
investor were to have bought the stock at the market price on the measurement date. The dividend yield
concept is used by investors to determine which shares will pay them a higher return on investment if they
were to purchase the shares. An investor should not solely base a purchase decision on the dividend yield,
since a company in financial trouble might still have a high dividend yield. Instead, you should also evaluate
the payout ratio, which is the proportion of earnings being paid out to shareholders as dividends. If the
payout ratio is high, and especially if it is increasing over time, this means that the company may not be able
to support the current dividend level for much longer, and also may be experiencing significant financial
difficulties that could result in a rapid decline in the price of the stock; If a company is in a slow-growth
industry and cannot find other uses for its cash flow, it is more likely to pay out a higher dividend yield to its
investors, thereby attracting investors who are more interested in steady income from the dividends. If a
company is in a high-growth industry and is using all available cash flow to fund its operations, there may be
no dividend yield at all, which attracts a different group of investors who are more interested in achieving
capital gains from having the price of the stock increase over time.

The book-to-market ratio is used to find a company's value by comparing its book value to its market value.
If the market value of a company is trading higher than its book value per share, it is considered to be
overvalued. If the book value is higher than the market value, analysts consider the company to be
undervalued.
Ratios Definition
Ability of the firm to meet its short term
Liquidity obligations

Current Ratio Current Assets/Current Liabilities

Quick Ratio Quick Assets/Current Liabilities

Quick Assets Cash+Marketable Securities+Accounts Receivables

Ability of the firm to effectively manage its

Activity investment in assets

Asset Turnover Operating Revenue/Average Total Asset

Receivables Turnover Operating Revenue/Average Accounts Receivables

Days' receivables or Average Average Accounts Receivables/Operating
collection period Revenues*356

Inventory Turnover Cost of Goods Sold/Average Inventory

Days in Inventory 365/Inventory Turnover 365

Days' Payables Accounts Payables/Cost of Goods Sold*365

 The extent to which the firm relies on debt
Financial Leverage financing

Debt Ratio Total Debt/ Total Assets

Debt to Equity Ratio Debt/Total Equity

Equity Multiplier Total Assets/Total Equity

Earnings before Interest and Taxes (EBIT)/Interest

Interest Coverage Expense

Earnings before Fixed Charges and Taxes/Fixed

Fixed Charge Coverage Charges

Profitability The extent to which the firm is profitable

Net Profit Margin Net Income/Revenue

Gross Profit Margin Gross Profit/Revenue

Contribution Margin Operating Revenue - Variable Costs

Operating Leverage (Change in EBIT/EBIT)*(Sales/Change in Sales)
Operating Margin Operating Income / Operating Revenues

Return on Assets (ROA)

Net Income/Average Total Assets

Profit Margin*Asset Turnover #DIV/0! #DIV/0!
(Net Income/Operating Revenue)*(Operating
Revenue/Average Assets)

Economic Value Added ROA - Weighted Average Cost of Capital (WACC)

Net Income/Average Stockholders' Equity

ROE

Profit Margin*Asset Turnover*Equity Multiplier #DIV/0! #DIV/0!

(Net Income/Operating Revenue)*(Operating
Revenue/Average Assets)*(Average
Assets/Average Stockholders' Equity)
DuPont Model
ROE
ROA
Asset TurnOver
Net Margin
Equity Multiplier

Value Value of the firm

Earnings per Share (EPS) Earnings Available to Common Shareholders/Wtd

Average no. of Common Shares O/S
(Net Income - Preferred Dividends)/Wtd. Average
no. of Common Shares O/S

Price to Earnings (P/E) Market Price Per Share/Earnings Per Share

Dividend Yield Dividend per share/market price per share

Market to Book Value Market Price Per Share/Book Value Per Share
Formula Result

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!
 365 #DIV/0!

#DIV/0!

#DIV/0!

365 #DIV/0!
#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!
#DIV/0!

#DIV/0!

0
 #DIV/0!
#DIV/0!

#DIV/0!
#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0! #DIV/0!

#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!
Interpretation

A ratio under 1 indicates that the company’s debts due in a year or less are greater than its assets (cash or
other short-term assets expected to be converted to cash within a year or less.)

On the other hand, in theory, the higher the current ratio, the more capable a company is of paying its
obligations because it has a larger proportion of short-term asset value relative to the value of its short-term
liabilities. However, while a high ratio, say over 3, could indicate the company can cover its current liabilities
three times, it may indicate that it's not using its current assets efficiently, is not securing financing very well,
or is not managing its working capital.

A result of 1 is considered to be the normal quick ratio, as it indicates that the company is fully equipped
with exactly enough assets to be instantly liquidated to pay off its current liabilities. A company that has a
quick ratio of less than 1 may not be able to fully pay off its current liabilities in the short term, while a
company having a quick ratio higher than 1 can instantly get rid of its current liabilities. For instance, a quick
ratio of 1.5 indicates that the company has $1.50 of liquid assets available to cover each $1 of its current
liabilities.

The asset turnover ratio is an efficiency ratio that measures a company’s ability to generate sales from its
assets by comparing net sales with average total assets. In other words, this ratio shows how efficiently a
company can use its assets to generate sales. This ratio measures how efficiently a firm uses its assets to
generate sales, so a higher ratio is always more favorable. Higher turnover ratios mean the company is using
its assets more efficiently. Lower ratios mean that the company isn’t using its assets efficiently and most
likely have management or production problems.
For instance, a ratio of 1 means that the net sales of a company equals the average total assets for the year.
In other words, the company is generating 1 dollar of sales for every dollar invested in assets.

The ratio is used to evaluate the ability of a company to efficiently issue credit to its customers and collect
funds from them in a timely manner. A high turnover ratio indicates a combination of a conservative credit
policy and an aggressive collections department, as well as a number of high-quality customers. A low
turnover ratio represents an opportunity to collect excessively old accounts receivable that are unnecessarily
tying up working capital. Low receivable turnover may be caused by a loose or nonexistent credit policy, an
inadequate collections function, and/or a large proportion of customers having financial difficulties. It is also
quite likely that a low turnover level indicates an excessive amount of bad debt. It is useful to track accounts
receivable turnover on a trend line in order to see if turnover is slowing down; if so, an increase in funding
for the collections staff may be required, or at least a review of why turnover is worsening.
An increase in the average collection period can be indicative of any of the following conditions:

Looser credit policy. Management has decided to grant more credit to customers, perhaps in an effort to
increase sales. This may also mean that certain customers are being allowed a longer period of time before
they must pay for outstanding invoices. This is especially common when a small business wants to sell to a
large retail chain, which can promise a large sales boost in exchange for long payment terms.
Worsening economy. General economic conditions could be impacting customer cash flows, requiring them
to delay payments to their suppliers.
Reduced collection efforts. There may be a decline in the funding for the collections department or an
increase in the staff turnover of this department. In either case, less attention is paid to collections, resulting
in an increase in the amount of receivables outstanding.
A decrease in the average collection period can be indicative of any of the following conditions:

Tighter credit policy. Management may restrict the granting of credit to customers for a number of reasons,
such as in anticipation of a decline in economic conditions or not having enough working capital to support
the current level of accounts receivable.
Reduced terms. The company may have imposed shorter payment terms on its customers.
Increased collection efforts. Management may have decided to increase the staffing and technology support
of the collections department, which should result in a reduction in the amount of overdue accounts
receivable.

When there is a low rate of inventory turnover, this implies that a business may have a flawed purchasing
system that bought too many goods, or that stocks were increased in anticipation of sales that did not occur.
In both cases, there is a high risk of inventory aging, in which case it becomes obsolete and has little residual
value.

When there is a high rate of inventory turnover, this implies that the purchasing function is tightly managed.
However, it may also mean that a business does not have the cash reserves to maintain normal inventory
levels, and so is turning away prospective sales. The latter scenario is most likely when the amount of debt is
unusually high and there are few cash reserves.

A small number of days' sales in inventory indicates that a company is more efficient at selling off its
inventory, while a large number indicates that it may have invested too much in inventory, and may even
have obsolete inventory on hand. However, a large number may also mean that management has decided to
maintain high inventory levels in order to achieve high order fulfillment rates.

The cash conversion cycle measures the time period required to convert resources into cash. The intent
behind the measurement is to determine how long it takes for funds paid to buy resources to be converted
into cash by selling the resulting goods and being paid by customers. A short conversion cycle is considered
highly desirable, since it means that a business can be operated with a reduced amount of cash. A company
with a shorter conversion cycle than its peer group probably has reached this point due to a continual review
of the entire process over a long period of time. At a minimum, a responsible manager may want to track the
conversion cycle on a trend line, and take action whenever the cycle indicates that it is taking longer to
convert invested funds back into cash.

The cycle is also closely monitored in smaller organizations that have minimal amounts of equity or debt
funding. These businesses have so little excess cash that they must be mindful of how their cash is being
used. This is a particular problem for nonprofit entities, since they usually have small cash reserves.
The debt ratio measures the proportion of assets paid for with debt. One can use the ratio to reach
conclusions about the solvency of a business. A high ratio implies that the bulk of company financing is
coming from debt; this is a risky financial structure, since the borrower is at risk of not being able to pay for
the associated interest expense or paying back the principal. A low debt ratio reflects a conservative
financing strategy of using only equity to pay for assets.

The debt to equity ratio measures the riskiness of a company's financial structure by comparing its total debt
to its total equity. The ratio reveals the relative proportions of debt and equity financing that a business
employs. It is closely monitored by lenders and creditors, since it can provide early warning that an
organization is so overwhelmed by debt that it is unable to meet its payment obligations. This is also a
funding issue. For example, the owners of a business may not want to contribute any more cash to the
company, so they acquire more debt to address the cash shortfall. Or, a company may use debt to buy back
shares, thereby increasing the return on investment to the remaining shareholders.

When a business has a high debt to equity ratio, it has imposed on itself a large block of fixed cost in the
form of interest expense, which increases its breakeven point. This situation means that it takes more sales
for the firm to earn a profit, so that its earnings will be more volatile than would have been the case without
the debt.

The equity multiplier is the ratio of a company's total assets to its stockholders' equity. The ratio is intended
to measure the extent to which equity is used to pay for all types of company assets. If the ratio is high, it
implies that assets are being funded with a high proportion of debt. Conversely, if the ratio is low, it implies
that management is either avoiding the use of debt or the company is unable to obtain debt from
prospective lenders.

The interest coverage ratio measures the ability of a company to pay the interest on its outstanding debt.
This measurement is used by creditors, lenders, and investors to determine the risk of lending funds to a
company. A high ratio indicates that a company can pay for its interest expense several times over, while a
low ratio is a strong indicator that a company may default on its loan payments.

The fixed charge coverage ratio is used to examine the extent to which fixed costs consume the cash flow of
a business. In effect, it shows how many times a business can pay for its fixed costs with its earnings before
interest and taxes. The ratio is most commonly applied when a company has incurred a large amount of debt
and must make ongoing interest payments. If the resulting ratio is low, it is a strong indicator that any
subsequent drop in the profits of a business may bring about its failure. Conversely, a high ratio indicates that
a business can safely use more debt to fund its growth. The ratio is typically used by lenders evaluating an
existing or prospective borrower.
The net profit margin is equal to how much net income or profit is generated as a percentage of revenue. Net
profit margin is the ratio of net profits to revenues for a company or business segment. Net profit margin is
typically expressed as a percentage but can also be represented in decimal form. The net profit margin
illustrates how much of each dollar in revenue collected by a company translates into profit. Improvement
An increase in profit margin compared to the previous period's margin signals an improvement in both
operational efficiency and profitability. For example, a current margin of 10 percent compared to last
month's margin of 9.5 percent means the company improved its profits and efficiency by .5 percent. A
margin higher than those of other companies or higher than the industry average means your business
performed better than those companies during that period.

Decline
A decline in net profit margin means a decline in performance and profitability levels. Net profit margin is
determined by the difference between total revenue and total expense. The margin goes up if the difference
between revenue and expense becomes bigger, but it will decline once the difference between these two
accounts becomes smaller. A lower margin compared to other margins is indicative of a lower performance
level.

No Change
A margin that stays the same means there is no improvement or decline in performance level. Sales may rise
and expenses may go down, but no improvement or decline in performance has been achieved if the same
margin is generated from one period to the next. It is possible that even with more resources in terms of
labor, time and money, your ability to generate profit this period is still at the same level as last period's.
Gross profit margin is the percentage of your periodic revenue that you convert to gross profit. When a
company makes more money on each product it sells, it has a higher gross profit margin. If it starts to get
less per product sold, its gross profit margin decreases.

The contribution margin ratio is the difference between a company's sales and variable expenses, expressed
as a percentage. The total margin generated by an entity represents the total earnings available to pay for
fixed expenses and generate a profit. When used on an individual unit sale, the ratio expresses the
proportion of profit generated on that specific sale.

The contribution margin should be relatively high, since it must be sufficient to also cover fixed expenses and
administrative overhead. Also, the measure is useful for determining whether to allow a lower price in
special pricing situations. If the contribution margin ratio is excessively low or negative, it would be unwise to
continue selling a product at that price point, since the company would have considerable difficulty earning a
profit over the long term. However, there are cases where it may be acceptable to sell a package of goods
and/or services where individual items within the package have a negative contribution margin, as long as
the contribution margin for the entire package is positive. The ratio is also useful for determining the profits
that will arise from various sales levels.
Operating leverage measures a company’s fixed costs as a percentage of its total costs. It is used to evaluate
the breakeven point of a business, as well as the likely profit levels on individual sales. The following two
scenarios describe an organization having high operating leverage and low operating leverage.

High operating leverage. A large proportion of the company’s costs are fixed costs. In this case, the firm earns
a large profit on each incremental sale, but must attain sufficient sales volume to cover its substantial fixed
costs. If it can do so, then the entity will earn a major profit on all sales after it has paid for its fixed costs.
However, earnings will be more sensitive to changes in sales volume.

Low operating leverage. A large proportion of the company’s sales are variable costs, so it only incurs these
costs when there is a sale. In this case, the firm earns a smaller profit on each incremental sale, but does not
have to generate much sales volume in order to cover its lower fixed costs. It is easier for this type of
company to earn a profit at low sales levels, but it does not earn outsized profits if it can generate additional
sales.

The return on assets compares the net earnings of a business to its total assets. It provides an estimate of
the efficiency of management in using assets to create a profit, and so is considered a key tool for evaluating
management performance. The return on assets ratio measures how effectively a company can earn a
return on its investment in assets. In other words, ROA shows how efficiently a company can convert the
money used to purchase assets into net income or profits.

Since all assets are either funded by equity or debt, some investors try to disregard the costs of acquiring the
assets in the return calculation by adding back interest expense in the formula.

It only makes sense that a higher ratio is more favorable to investors because it shows that the company is
more effectively managing its assets to produce greater amounts of net income.

Economic value added is the incremental difference in the rate of return over a company's cost of capital. In
essence, it is the value generated from funds invested in a business. If the economic value added
measurement turns out to be negative, this means that management is destroying the value of the funds
invested in a business. It is essential to review all of the components of this measurement to see which areas
of a business can be adjusted to create a higher level of economic value added. If the total economic value
added remains negative despite all attempts to enhance it, the business should be shut down, so that the
underlying funding can be reinvested elsewhere.

The return on equity ratio reveals the amount of return earned on the shareholders' equity invested in a
business. The measurement is commonly used by investors to evaluate current and prospective business
investments. This return can be improved when a business buys back its own stock from investors, or by
using more debt and less equity to fund its operations.

The first thing that we need to think about in order to calculate and analyze Return on Equity (ROE) is Net
Profit. Net Profit here is the profit after tax that entity generates for the period of time.

Net profit arrived after deduction many significant importance expenses. Those expenses are included Cost
of Goods Sold, Operating Expenses, Interest Expenses as well as tax expenses.
The earnings per share ratio (EPS ratio) measures the amount of a company's net income that is theoretically
available for payment to the holders of its common stock. A company with a high earnings per share ratio is
capable of generating a significant dividend for investors, or it may plow the funds back into its business for
more growth; in either case, a high ratio indicates a potentially worthwhile investment, depending on the
market price of the stock.

The price earnings ratio compares the market price of a company's stock to its earnings per share. This ratio
reveals the multiple of earnings that the investment community is willing to pay to own a company's stock. A
very high multiple indicates that investors believe the company's earnings will improve dramatically, while a
low multiple indicates the reverse. If the ratio is already high, then there is little chance for the stock price to
move even higher, so there is significant risk that the share price will slide lower in the future; If a company is
currently reporting a loss, then it has no price earnings ratio at all.

The dividend yield ratio shows the proportion of dividends that a company pays out in comparison to the
market price of its stock. Thus, the dividend yield ratio is the return on investment to an investor if the
investor were to have bought the stock at the market price on the measurement date. The dividend yield
concept is used by investors to determine which shares will pay them a higher return on investment if they
were to purchase the shares. An investor should not solely base a purchase decision on the dividend yield,
since a company in financial trouble might still have a high dividend yield. Instead, you should also evaluate
the payout ratio, which is the proportion of earnings being paid out to shareholders as dividends. If the
payout ratio is high, and especially if it is increasing over time, this means that the company may not be able
to support the current dividend level for much longer, and also may be experiencing significant financial
difficulties that could result in a rapid decline in the price of the stock; If a company is in a slow-growth
industry and cannot find other uses for its cash flow, it is more likely to pay out a higher dividend yield to its
investors, thereby attracting investors who are more interested in steady income from the dividends. If a
company is in a high-growth industry and is using all available cash flow to fund its operations, there may be
no dividend yield at all, which attracts a different group of investors who are more interested in achieving
capital gains from having the price of the stock increase over time.

The book-to-market ratio is used to find a company's value by comparing its book value to its market value.
If the market value of a company is trading higher than its book value per share, it is considered to be
overvalued. If the book value is higher than the market value, analysts consider the company to be
undervalued.
Ratios Definition
Ability of the firm to meet its short term
Liquidity obligations

Current Ratio Current Assets/Current Liabilities

Quick Ratio Quick Assets/Current Liabilities

Quick Assets Cash+Marketable Securities+Accounts Receivables

Ability of the firm to effectively manage its

Activity investment in assets

Asset Turnover Operating Revenue/Average Total Asset

Receivables Turnover Operating Revenue/Average Accounts Receivables

Days' receivables or Average Average Accounts Receivables/Operating
collection period Revenues*356

Inventory Turnover Cost of Goods Sold/Average Inventory

Days in Inventory 365/Inventory Turnover 365

Days' Payables Accounts Payables/Cost of Goods Sold*365

 The extent to which the firm relies on debt
Financial Leverage financing

Debt Ratio Total Debt/ Total Assets

Debt to Equity Ratio Debt/Total Equity

Equity Multiplier Total Assets/Total Equity

Earnings before Interest and Taxes (EBIT)/Interest

Interest Coverage Expense

Earnings before Fixed Charges and Taxes/Fixed

Fixed Charge Coverage Charges

Profitability The extent to which the firm is profitable

Net Profit Margin Net Income/Revenue

Gross Profit Margin Gross Profit/Revenue

Contribution Margin Operating Revenue - Variable Costs

Operating Leverage (Change in EBIT/EBIT)*(Sales/Change in Sales)
Operating Margin Operating Income / Operating Revenues

Return on Assets (ROA)

Net Income/Average Total Assets

Profit Margin*Asset Turnover #DIV/0! #DIV/0!
(Net Income/Operating Revenue)*(Operating
Revenue/Average Assets)

Economic Value Added ROA - Weighted Average Cost of Capital (WACC)

Net Income/Average Stockholders' Equity

ROE

Profit Margin*Asset Turnover*Equity Multiplier #DIV/0! #DIV/0!

(Net Income/Operating Revenue)*(Operating
Revenue/Average Assets)*(Average
Assets/Average Stockholders' Equity)
DuPont Model
ROE
ROA
Asset TurnOver
Net Margin
Equity Multiplier

Value Value of the firm

Earnings per Share (EPS) Earnings Available to Common Shareholders/Wtd

Average no. of Common Shares O/S
(Net Income - Preferred Dividends)/Wtd. Average
no. of Common Shares O/S

Price to Earnings (P/E) Market Price Per Share/Earnings Per Share

Dividend Yield Dividend per share/market price per share

Market to Book Value Market Price Per Share/Book Value Per Share
Formula Result

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!
 365 #DIV/0!

#DIV/0!

#DIV/0!

365 #DIV/0!
#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!
#DIV/0!

#DIV/0!

0
 #DIV/0!
#DIV/0!

#DIV/0!
#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0! #DIV/0!

#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!
Interpretation

A ratio under 1 indicates that the company’s debts due in a year or less are greater than its assets (cash or
other short-term assets expected to be converted to cash within a year or less.)

On the other hand, in theory, the higher the current ratio, the more capable a company is of paying its
obligations because it has a larger proportion of short-term asset value relative to the value of its short-term
liabilities. However, while a high ratio, say over 3, could indicate the company can cover its current liabilities
three times, it may indicate that it's not using its current assets efficiently, is not securing financing very well,
or is not managing its working capital.

A result of 1 is considered to be the normal quick ratio, as it indicates that the company is fully equipped
with exactly enough assets to be instantly liquidated to pay off its current liabilities. A company that has a
quick ratio of less than 1 may not be able to fully pay off its current liabilities in the short term, while a
company having a quick ratio higher than 1 can instantly get rid of its current liabilities. For instance, a quick
ratio of 1.5 indicates that the company has $1.50 of liquid assets available to cover each $1 of its current
liabilities.

The asset turnover ratio is an efficiency ratio that measures a company’s ability to generate sales from its
assets by comparing net sales with average total assets. In other words, this ratio shows how efficiently a
company can use its assets to generate sales. This ratio measures how efficiently a firm uses its assets to
generate sales, so a higher ratio is always more favorable. Higher turnover ratios mean the company is using
its assets more efficiently. Lower ratios mean that the company isn’t using its assets efficiently and most
likely have management or production problems.
For instance, a ratio of 1 means that the net sales of a company equals the average total assets for the year.
In other words, the company is generating 1 dollar of sales for every dollar invested in assets.

The ratio is used to evaluate the ability of a company to efficiently issue credit to its customers and collect
funds from them in a timely manner. A high turnover ratio indicates a combination of a conservative credit
policy and an aggressive collections department, as well as a number of high-quality customers. A low
turnover ratio represents an opportunity to collect excessively old accounts receivable that are unnecessarily
tying up working capital. Low receivable turnover may be caused by a loose or nonexistent credit policy, an
inadequate collections function, and/or a large proportion of customers having financial difficulties. It is also
quite likely that a low turnover level indicates an excessive amount of bad debt. It is useful to track accounts
receivable turnover on a trend line in order to see if turnover is slowing down; if so, an increase in funding
for the collections staff may be required, or at least a review of why turnover is worsening.
An increase in the average collection period can be indicative of any of the following conditions:

Looser credit policy. Management has decided to grant more credit to customers, perhaps in an effort to
increase sales. This may also mean that certain customers are being allowed a longer period of time before
they must pay for outstanding invoices. This is especially common when a small business wants to sell to a
large retail chain, which can promise a large sales boost in exchange for long payment terms.
Worsening economy. General economic conditions could be impacting customer cash flows, requiring them
to delay payments to their suppliers.
Reduced collection efforts. There may be a decline in the funding for the collections department or an
increase in the staff turnover of this department. In either case, less attention is paid to collections, resulting
in an increase in the amount of receivables outstanding.
A decrease in the average collection period can be indicative of any of the following conditions:

Tighter credit policy. Management may restrict the granting of credit to customers for a number of reasons,
such as in anticipation of a decline in economic conditions or not having enough working capital to support
the current level of accounts receivable.
Reduced terms. The company may have imposed shorter payment terms on its customers.
Increased collection efforts. Management may have decided to increase the staffing and technology support
of the collections department, which should result in a reduction in the amount of overdue accounts
receivable.

When there is a low rate of inventory turnover, this implies that a business may have a flawed purchasing
system that bought too many goods, or that stocks were increased in anticipation of sales that did not occur.
In both cases, there is a high risk of inventory aging, in which case it becomes obsolete and has little residual
value.

When there is a high rate of inventory turnover, this implies that the purchasing function is tightly managed.
However, it may also mean that a business does not have the cash reserves to maintain normal inventory
levels, and so is turning away prospective sales. The latter scenario is most likely when the amount of debt is
unusually high and there are few cash reserves.

A small number of days' sales in inventory indicates that a company is more efficient at selling off its
inventory, while a large number indicates that it may have invested too much in inventory, and may even
have obsolete inventory on hand. However, a large number may also mean that management has decided to
maintain high inventory levels in order to achieve high order fulfillment rates.

The cash conversion cycle measures the time period required to convert resources into cash. The intent
behind the measurement is to determine how long it takes for funds paid to buy resources to be converted
into cash by selling the resulting goods and being paid by customers. A short conversion cycle is considered
highly desirable, since it means that a business can be operated with a reduced amount of cash. A company
with a shorter conversion cycle than its peer group probably has reached this point due to a continual review
of the entire process over a long period of time. At a minimum, a responsible manager may want to track the
conversion cycle on a trend line, and take action whenever the cycle indicates that it is taking longer to
convert invested funds back into cash.

The cycle is also closely monitored in smaller organizations that have minimal amounts of equity or debt
funding. These businesses have so little excess cash that they must be mindful of how their cash is being
used. This is a particular problem for nonprofit entities, since they usually have small cash reserves.
The debt ratio measures the proportion of assets paid for with debt. One can use the ratio to reach
conclusions about the solvency of a business. A high ratio implies that the bulk of company financing is
coming from debt; this is a risky financial structure, since the borrower is at risk of not being able to pay for
the associated interest expense or paying back the principal. A low debt ratio reflects a conservative
financing strategy of using only equity to pay for assets.

The debt to equity ratio measures the riskiness of a company's financial structure by comparing its total debt
to its total equity. The ratio reveals the relative proportions of debt and equity financing that a business
employs. It is closely monitored by lenders and creditors, since it can provide early warning that an
organization is so overwhelmed by debt that it is unable to meet its payment obligations. This is also a
funding issue. For example, the owners of a business may not want to contribute any more cash to the
company, so they acquire more debt to address the cash shortfall. Or, a company may use debt to buy back
shares, thereby increasing the return on investment to the remaining shareholders.

When a business has a high debt to equity ratio, it has imposed on itself a large block of fixed cost in the
form of interest expense, which increases its breakeven point. This situation means that it takes more sales
for the firm to earn a profit, so that its earnings will be more volatile than would have been the case without
the debt.

The equity multiplier is the ratio of a company's total assets to its stockholders' equity. The ratio is intended
to measure the extent to which equity is used to pay for all types of company assets. If the ratio is high, it
implies that assets are being funded with a high proportion of debt. Conversely, if the ratio is low, it implies
that management is either avoiding the use of debt or the company is unable to obtain debt from
prospective lenders.

The interest coverage ratio measures the ability of a company to pay the interest on its outstanding debt.
This measurement is used by creditors, lenders, and investors to determine the risk of lending funds to a
company. A high ratio indicates that a company can pay for its interest expense several times over, while a
low ratio is a strong indicator that a company may default on its loan payments.

The fixed charge coverage ratio is used to examine the extent to which fixed costs consume the cash flow of
a business. In effect, it shows how many times a business can pay for its fixed costs with its earnings before
interest and taxes. The ratio is most commonly applied when a company has incurred a large amount of debt
and must make ongoing interest payments. If the resulting ratio is low, it is a strong indicator that any
subsequent drop in the profits of a business may bring about its failure. Conversely, a high ratio indicates that
a business can safely use more debt to fund its growth. The ratio is typically used by lenders evaluating an
existing or prospective borrower.
The net profit margin is equal to how much net income or profit is generated as a percentage of revenue. Net
profit margin is the ratio of net profits to revenues for a company or business segment. Net profit margin is
typically expressed as a percentage but can also be represented in decimal form. The net profit margin
illustrates how much of each dollar in revenue collected by a company translates into profit. Improvement
An increase in profit margin compared to the previous period's margin signals an improvement in both
operational efficiency and profitability. For example, a current margin of 10 percent compared to last
month's margin of 9.5 percent means the company improved its profits and efficiency by .5 percent. A
margin higher than those of other companies or higher than the industry average means your business
performed better than those companies during that period.

Decline
A decline in net profit margin means a decline in performance and profitability levels. Net profit margin is
determined by the difference between total revenue and total expense. The margin goes up if the difference
between revenue and expense becomes bigger, but it will decline once the difference between these two
accounts becomes smaller. A lower margin compared to other margins is indicative of a lower performance
level.

No Change
A margin that stays the same means there is no improvement or decline in performance level. Sales may rise
and expenses may go down, but no improvement or decline in performance has been achieved if the same
margin is generated from one period to the next. It is possible that even with more resources in terms of
labor, time and money, your ability to generate profit this period is still at the same level as last period's.
Gross profit margin is the percentage of your periodic revenue that you convert to gross profit. When a
company makes more money on each product it sells, it has a higher gross profit margin. If it starts to get
less per product sold, its gross profit margin decreases.

The contribution margin ratio is the difference between a company's sales and variable expenses, expressed
as a percentage. The total margin generated by an entity represents the total earnings available to pay for
fixed expenses and generate a profit. When used on an individual unit sale, the ratio expresses the
proportion of profit generated on that specific sale.

The contribution margin should be relatively high, since it must be sufficient to also cover fixed expenses and
administrative overhead. Also, the measure is useful for determining whether to allow a lower price in
special pricing situations. If the contribution margin ratio is excessively low or negative, it would be unwise to
continue selling a product at that price point, since the company would have considerable difficulty earning a
profit over the long term. However, there are cases where it may be acceptable to sell a package of goods
and/or services where individual items within the package have a negative contribution margin, as long as
the contribution margin for the entire package is positive. The ratio is also useful for determining the profits
that will arise from various sales levels.
Operating leverage measures a company’s fixed costs as a percentage of its total costs. It is used to evaluate
the breakeven point of a business, as well as the likely profit levels on individual sales. The following two
scenarios describe an organization having high operating leverage and low operating leverage.

High operating leverage. A large proportion of the company’s costs are fixed costs. In this case, the firm earns
a large profit on each incremental sale, but must attain sufficient sales volume to cover its substantial fixed
costs. If it can do so, then the entity will earn a major profit on all sales after it has paid for its fixed costs.
However, earnings will be more sensitive to changes in sales volume.

Low operating leverage. A large proportion of the company’s sales are variable costs, so it only incurs these
costs when there is a sale. In this case, the firm earns a smaller profit on each incremental sale, but does not
have to generate much sales volume in order to cover its lower fixed costs. It is easier for this type of
company to earn a profit at low sales levels, but it does not earn outsized profits if it can generate additional
sales.

The return on assets compares the net earnings of a business to its total assets. It provides an estimate of
the efficiency of management in using assets to create a profit, and so is considered a key tool for evaluating
management performance. The return on assets ratio measures how effectively a company can earn a
return on its investment in assets. In other words, ROA shows how efficiently a company can convert the
money used to purchase assets into net income or profits.

Since all assets are either funded by equity or debt, some investors try to disregard the costs of acquiring the
assets in the return calculation by adding back interest expense in the formula.

It only makes sense that a higher ratio is more favorable to investors because it shows that the company is
more effectively managing its assets to produce greater amounts of net income.

Economic value added is the incremental difference in the rate of return over a company's cost of capital. In
essence, it is the value generated from funds invested in a business. If the economic value added
measurement turns out to be negative, this means that management is destroying the value of the funds
invested in a business. It is essential to review all of the components of this measurement to see which areas
of a business can be adjusted to create a higher level of economic value added. If the total economic value
added remains negative despite all attempts to enhance it, the business should be shut down, so that the
underlying funding can be reinvested elsewhere.

The return on equity ratio reveals the amount of return earned on the shareholders' equity invested in a
business. The measurement is commonly used by investors to evaluate current and prospective business
investments. This return can be improved when a business buys back its own stock from investors, or by
using more debt and less equity to fund its operations.

The first thing that we need to think about in order to calculate and analyze Return on Equity (ROE) is Net
Profit. Net Profit here is the profit after tax that entity generates for the period of time.

Net profit arrived after deduction many significant importance expenses. Those expenses are included Cost
of Goods Sold, Operating Expenses, Interest Expenses as well as tax expenses.
The earnings per share ratio (EPS ratio) measures the amount of a company's net income that is theoretically
available for payment to the holders of its common stock. A company with a high earnings per share ratio is
capable of generating a significant dividend for investors, or it may plow the funds back into its business for
more growth; in either case, a high ratio indicates a potentially worthwhile investment, depending on the
market price of the stock.

The price earnings ratio compares the market price of a company's stock to its earnings per share. This ratio
reveals the multiple of earnings that the investment community is willing to pay to own a company's stock. A
very high multiple indicates that investors believe the company's earnings will improve dramatically, while a
low multiple indicates the reverse. If the ratio is already high, then there is little chance for the stock price to
move even higher, so there is significant risk that the share price will slide lower in the future; If a company is
currently reporting a loss, then it has no price earnings ratio at all.

The dividend yield ratio shows the proportion of dividends that a company pays out in comparison to the
market price of its stock. Thus, the dividend yield ratio is the return on investment to an investor if the
investor were to have bought the stock at the market price on the measurement date. The dividend yield
concept is used by investors to determine which shares will pay them a higher return on investment if they
were to purchase the shares. An investor should not solely base a purchase decision on the dividend yield,
since a company in financial trouble might still have a high dividend yield. Instead, you should also evaluate
the payout ratio, which is the proportion of earnings being paid out to shareholders as dividends. If the
payout ratio is high, and especially if it is increasing over time, this means that the company may not be able
to support the current dividend level for much longer, and also may be experiencing significant financial
difficulties that could result in a rapid decline in the price of the stock; If a company is in a slow-growth
industry and cannot find other uses for its cash flow, it is more likely to pay out a higher dividend yield to its
investors, thereby attracting investors who are more interested in steady income from the dividends. If a
company is in a high-growth industry and is using all available cash flow to fund its operations, there may be
no dividend yield at all, which attracts a different group of investors who are more interested in achieving
capital gains from having the price of the stock increase over time.

The book-to-market ratio is used to find a company's value by comparing its book value to its market value.
If the market value of a company is trading higher than its book value per share, it is considered to be
overvalued. If the book value is higher than the market value, analysts consider the company to be
undervalued.
Ratios Definition
Ability of the firm to meet its short term
Liquidity obligations

Current Ratio Current Assets/Current Liabilities

Quick Ratio Quick Assets/Current Liabilities

Quick Assets Cash+Marketable Securities+Accounts Receivables

Ability of the firm to effectively manage its

Activity investment in assets

Asset Turnover Operating Revenue/Average Total Asset

Receivables Turnover Operating Revenue/Average Accounts Receivables

Days' receivables or Average Average Accounts Receivables/Operating
collection period Revenues*356

Inventory Turnover Cost of Goods Sold/Average Inventory

Days in Inventory 365/Inventory Turnover

Days' Payables Accounts Payables/Cost of Goods Sold*365

 The extent to which the firm relies on debt
Financial Leverage financing

Debt Ratio Debt/Assets

Debt to Equity Ratio Debt/Equity

Equity Multiplier Assets/Equity

Earnings before Interest and Taxes (EBIT)/Interest

Interest Coverage Expense

Earnings before Fixed Charges and Taxes/Fixed

Fixed Charge Coverage Charges

Profitability The extent to which the firm is profitable

Net Profit Margin Net Income/Revenue

Gross Profit Margin Gross Profit/Revenue

Contribution Margin Operating Revenue - Variable Costs

Operating Leverage (Change in EBIT/EBIT)*(Sales/Change in Sales)
Operating Margin Operating Income / Operating Revenues

Return on Assets (ROA)

Net Income/Average Total Assets

Profit Margin*Asset Turnover
(Net Income/Operating Revenue)*(Operating
Revenue/Average Assets)

Economic Value Added ROA - Weighted Average Cost of Capital (WACC)

Net Income/Average Stockholders' Equity

ROE

Profit Margin*Asset Turnover*Equity Multiplier

(Net Income/Operating Revenue)*(Operating
Revenue/Average Assets)*(Average
Assets/Average Stockholders' Equity)
DuPont Model
ROE
ROA
Asset TurnOver
Net Margin
Equity Multiplier

Value Value of the firm

Earnings per Share (EPS) Earnings Available to Common Shareholders/Wtd

Average no. of Common Shares O/S
(Net Income - Preferred Dividends)/Wtd. Average
no. of Common Shares O/S

Price to Earnings (P/E) Market Price Per Share/Earnings Per Share

Dividend Yield Dividend per share/market price per share

Market to Book Value Market Price Per Share/Book Value Per Share
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Interpretation

A ratio under 1 indicates that the company’s debts due in a year or less are greater than its assets (cash or
other short-term assets expected to be converted to cash within a year or less.)

On the other hand, in theory, the higher the current ratio, the more capable a company is of paying its
obligations because it has a larger proportion of short-term asset value relative to the value of its short-term
liabilities. However, while a high ratio, say over 3, could indicate the company can cover its current liabilities
three times, it may indicate that it's not using its current assets efficiently, is not securing financing very well,
or is not managing its working capital.

A result of 1 is considered to be the normal quick ratio, as it indicates that the company is fully equipped
with exactly enough assets to be instantly liquidated to pay off its current liabilities. A company that has a
quick ratio of less than 1 may not be able to fully pay off its current liabilities in the short term, while a
company having a quick ratio higher than 1 can instantly get rid of its current liabilities. For instance, a quick
ratio of 1.5 indicates that the company has $1.50 of liquid assets available to cover each $1 of its current
liabilities.

The asset turnover ratio is an efficiency ratio that measures a company’s ability to generate sales from its
assets by comparing net sales with average total assets. In other words, this ratio shows how efficiently a
company can use its assets to generate sales. This ratio measures how efficiently a firm uses its assets to
generate sales, so a higher ratio is always more favorable. Higher turnover ratios mean the company is using
its assets more efficiently. Lower ratios mean that the company isn’t using its assets efficiently and most
likely have management or production problems.
For instance, a ratio of 1 means that the net sales of a company equals the average total assets for the year.
In other words, the company is generating 1 dollar of sales for every dollar invested in assets.

The ratio is used to evaluate the ability of a company to efficiently issue credit to its customers and collect
funds from them in a timely manner. A high turnover ratio indicates a combination of a conservative credit
policy and an aggressive collections department, as well as a number of high-quality customers. A low
turnover ratio represents an opportunity to collect excessively old accounts receivable that are unnecessarily
tying up working capital. Low receivable turnover may be caused by a loose or nonexistent credit policy, an
inadequate collections function, and/or a large proportion of customers having financial difficulties. It is also
quite likely that a low turnover level indicates an excessive amount of bad debt. It is useful to track accounts
receivable turnover on a trend line in order to see if turnover is slowing down; if so, an increase in funding
for the collections staff may be required, or at least a review of why turnover is worsening.
An increase in the average collection period can be indicative of any of the following conditions:

Looser credit policy. Management has decided to grant more credit to customers, perhaps in an effort to
increase sales. This may also mean that certain customers are being allowed a longer period of time before
they must pay for outstanding invoices. This is especially common when a small business wants to sell to a
large retail chain, which can promise a large sales boost in exchange for long payment terms.
Worsening economy. General economic conditions could be impacting customer cash flows, requiring them
to delay payments to their suppliers.
Reduced collection efforts. There may be a decline in the funding for the collections department or an
increase in the staff turnover of this department. In either case, less attention is paid to collections, resulting
in an increase in the amount of receivables outstanding.
A decrease in the average collection period can be indicative of any of the following conditions:

Tighter credit policy. Management may restrict the granting of credit to customers for a number of reasons,
such as in anticipation of a decline in economic conditions or not having enough working capital to support
the current level of accounts receivable.
Reduced terms. The company may have imposed shorter payment terms on its customers.
Increased collection efforts. Management may have decided to increase the staffing and technology support
of the collections department, which should result in a reduction in the amount of overdue accounts
receivable.

When there is a low rate of inventory turnover, this implies that a business may have a flawed purchasing
system that bought too many goods, or that stocks were increased in anticipation of sales that did not occur.
In both cases, there is a high risk of inventory aging, in which case it becomes obsolete and has little residual
value.

When there is a high rate of inventory turnover, this implies that the purchasing function is tightly managed.
However, it may also mean that a business does not have the cash reserves to maintain normal inventory
levels, and so is turning away prospective sales. The latter scenario is most likely when the amount of debt is
unusually high and there are few cash reserves.

A small number of days' sales in inventory indicates that a company is more efficient at selling off its
inventory, while a large number indicates that it may have invested too much in inventory, and may even
have obsolete inventory on hand. However, a large number may also mean that management has decided to
maintain high inventory levels in order to achieve high order fulfillment rates.

The cash conversion cycle measures the time period required to convert resources into cash. The intent
behind the measurement is to determine how long it takes for funds paid to buy resources to be converted
into cash by selling the resulting goods and being paid by customers. A short conversion cycle is considered
highly desirable, since it means that a business can be operated with a reduced amount of cash. A company
with a shorter conversion cycle than its peer group probably has reached this point due to a continual review
of the entire process over a long period of time. At a minimum, a responsible manager may want to track the
conversion cycle on a trend line, and take action whenever the cycle indicates that it is taking longer to
convert invested funds back into cash.

The cycle is also closely monitored in smaller organizations that have minimal amounts of equity or debt
funding. These businesses have so little excess cash that they must be mindful of how their cash is being
used. This is a particular problem for nonprofit entities, since they usually have small cash reserves.
The debt ratio measures the proportion of assets paid for with debt. One can use the ratio to reach
conclusions about the solvency of a business. A high ratio implies that the bulk of company financing is
coming from debt; this is a risky financial structure, since the borrower is at risk of not being able to pay for
the associated interest expense or paying back the principal. A low debt ratio reflects a conservative
financing strategy of using only equity to pay for assets.

The debt to equity ratio measures the riskiness of a company's financial structure by comparing its total debt
to its total equity. The ratio reveals the relative proportions of debt and equity financing that a business
employs. It is closely monitored by lenders and creditors, since it can provide early warning that an
organization is so overwhelmed by debt that it is unable to meet its payment obligations. This is also a
funding issue. For example, the owners of a business may not want to contribute any more cash to the
company, so they acquire more debt to address the cash shortfall. Or, a company may use debt to buy back
shares, thereby increasing the return on investment to the remaining shareholders.

When a business has a high debt to equity ratio, it has imposed on itself a large block of fixed cost in the
form of interest expense, which increases its breakeven point. This situation means that it takes more sales
for the firm to earn a profit, so that its earnings will be more volatile than would have been the case without
the debt.

The equity multiplier is the ratio of a company's total assets to its stockholders' equity. The ratio is intended
to measure the extent to which equity is used to pay for all types of company assets. If the ratio is high, it
implies that assets are being funded with a high proportion of debt. Conversely, if the ratio is low, it implies
that management is either avoiding the use of debt or the company is unable to obtain debt from
prospective lenders.

The interest coverage ratio measures the ability of a company to pay the interest on its outstanding debt.
This measurement is used by creditors, lenders, and investors to determine the risk of lending funds to a
company. A high ratio indicates that a company can pay for its interest expense several times over, while a
low ratio is a strong indicator that a company may default on its loan payments.

The fixed charge coverage ratio is used to examine the extent to which fixed costs consume the cash flow of
a business. In effect, it shows how many times a business can pay for its fixed costs with its earnings before
interest and taxes. The ratio is most commonly applied when a company has incurred a large amount of debt
and must make ongoing interest payments. If the resulting ratio is low, it is a strong indicator that any
subsequent drop in the profits of a business may bring about its failure. Conversely, a high ratio indicates that
a business can safely use more debt to fund its growth. The ratio is typically used by lenders evaluating an
existing or prospective borrower.
The net profit margin is equal to how much net income or profit is generated as a percentage of revenue. Net
profit margin is the ratio of net profits to revenues for a company or business segment. Net profit margin is
typically expressed as a percentage but can also be represented in decimal form. The net profit margin
illustrates how much of each dollar in revenue collected by a company translates into profit. Improvement
An increase in profit margin compared to the previous period's margin signals an improvement in both
operational efficiency and profitability. For example, a current margin of 10 percent compared to last
month's margin of 9.5 percent means the company improved its profits and efficiency by .5 percent. A
margin higher than those of other companies or higher than the industry average means your business
performed better than those companies during that period.

Decline
A decline in net profit margin means a decline in performance and profitability levels. Net profit margin is
determined by the difference between total revenue and total expense. The margin goes up if the difference
between revenue and expense becomes bigger, but it will decline once the difference between these two
accounts becomes smaller. A lower margin compared to other margins is indicative of a lower performance
level.

No Change
A margin that stays the same means there is no improvement or decline in performance level. Sales may rise
and expenses may go down, but no improvement or decline in performance has been achieved if the same
margin is generated from one period to the next. It is possible that even with more resources in terms of
labor, time and money, your ability to generate profit this period is still at the same level as last period's.
Gross profit margin is the percentage of your periodic revenue that you convert to gross profit. When a
company makes more money on each product it sells, it has a higher gross profit margin. If it starts to get
less per product sold, its gross profit margin decreases.

The contribution margin ratio is the difference between a company's sales and variable expenses, expressed
as a percentage. The total margin generated by an entity represents the total earnings available to pay for
fixed expenses and generate a profit. When used on an individual unit sale, the ratio expresses the
proportion of profit generated on that specific sale.

The contribution margin should be relatively high, since it must be sufficient to also cover fixed expenses and
administrative overhead. Also, the measure is useful for determining whether to allow a lower price in
special pricing situations. If the contribution margin ratio is excessively low or negative, it would be unwise to
continue selling a product at that price point, since the company would have considerable difficulty earning a
profit over the long term. However, there are cases where it may be acceptable to sell a package of goods
and/or services where individual items within the package have a negative contribution margin, as long as
the contribution margin for the entire package is positive. The ratio is also useful for determining the profits
that will arise from various sales levels.
Operating leverage measures a company’s fixed costs as a percentage of its total costs. It is used to evaluate
the breakeven point of a business, as well as the likely profit levels on individual sales. The following two
scenarios describe an organization having high operating leverage and low operating leverage.

High operating leverage. A large proportion of the company’s costs are fixed costs. In this case, the firm earns
a large profit on each incremental sale, but must attain sufficient sales volume to cover its substantial fixed
costs. If it can do so, then the entity will earn a major profit on all sales after it has paid for its fixed costs.
However, earnings will be more sensitive to changes in sales volume.

Low operating leverage. A large proportion of the company’s sales are variable costs, so it only incurs these
costs when there is a sale. In this case, the firm earns a smaller profit on each incremental sale, but does not
have to generate much sales volume in order to cover its lower fixed costs. It is easier for this type of
company to earn a profit at low sales levels, but it does not earn outsized profits if it can generate additional
sales.

The return on assets compares the net earnings of a business to its total assets. It provides an estimate of
the efficiency of management in using assets to create a profit, and so is considered a key tool for evaluating
management performance. The return on assets ratio measures how effectively a company can earn a
return on its investment in assets. In other words, ROA shows how efficiently a company can convert the
money used to purchase assets into net income or profits.

Since all assets are either funded by equity or debt, some investors try to disregard the costs of acquiring the
assets in the return calculation by adding back interest expense in the formula.

It only makes sense that a higher ratio is more favorable to investors because it shows that the company is
more effectively managing its assets to produce greater amounts of net income.

Economic value added is the incremental difference in the rate of return over a company's cost of capital. In
essence, it is the value generated from funds invested in a business. If the economic value added
measurement turns out to be negative, this means that management is destroying the value of the funds
invested in a business. It is essential to review all of the components of this measurement to see which areas
of a business can be adjusted to create a higher level of economic value added. If the total economic value
added remains negative despite all attempts to enhance it, the business should be shut down, so that the
underlying funding can be reinvested elsewhere.

The return on equity ratio reveals the amount of return earned on the shareholders' equity invested in a
business. The measurement is commonly used by investors to evaluate current and prospective business
investments. This return can be improved when a business buys back its own stock from investors, or by
using more debt and less equity to fund its operations.

The first thing that we need to think about in order to calculate and analyze Return on Equity (ROE) is Net
Profit. Net Profit here is the profit after tax that entity generates for the period of time.

Net profit arrived after deduction many significant importance expenses. Those expenses are included Cost
of Goods Sold, Operating Expenses, Interest Expenses as well as tax expenses.
The earnings per share ratio (EPS ratio) measures the amount of a company's net income that is theoretically
available for payment to the holders of its common stock. A company with a high earnings per share ratio is
capable of generating a significant dividend for investors, or it may plow the funds back into its business for
more growth; in either case, a high ratio indicates a potentially worthwhile investment, depending on the
market price of the stock.

The price earnings ratio compares the market price of a company's stock to its earnings per share. This ratio
reveals the multiple of earnings that the investment community is willing to pay to own a company's stock. A
very high multiple indicates that investors believe the company's earnings will improve dramatically, while a
low multiple indicates the reverse. If the ratio is already high, then there is little chance for the stock price to
move even higher, so there is significant risk that the share price will slide lower in the future; If a company is
currently reporting a loss, then it has no price earnings ratio at all.

The dividend yield ratio shows the proportion of dividends that a company pays out in comparison to the
market price of its stock. Thus, the dividend yield ratio is the return on investment to an investor if the
investor were to have bought the stock at the market price on the measurement date. The dividend yield
concept is used by investors to determine which shares will pay them a higher return on investment if they
were to purchase the shares. An investor should not solely base a purchase decision on the dividend yield,
since a company in financial trouble might still have a high dividend yield. Instead, you should also evaluate
the payout ratio, which is the proportion of earnings being paid out to shareholders as dividends. If the
payout ratio is high, and especially if it is increasing over time, this means that the company may not be able
to support the current dividend level for much longer, and also may be experiencing significant financial
difficulties that could result in a rapid decline in the price of the stock; If a company is in a slow-growth
industry and cannot find other uses for its cash flow, it is more likely to pay out a higher dividend yield to its
investors, thereby attracting investors who are more interested in steady income from the dividends. If a
company is in a high-growth industry and is using all available cash flow to fund its operations, there may be
no dividend yield at all, which attracts a different group of investors who are more interested in achieving
capital gains from having the price of the stock increase over time.

The book-to-market ratio is used to find a company's value by comparing its book value to its market value.
If the market value of a company is trading higher than its book value per share, it is considered to be
overvalued. If the book value is higher than the market value, analysts consider the company to be
undervalued.