V. STOCKS
L. RATIO ANALYSIS
1. Ratios That Measure Liquidity (the
firm’s ability to convert assets into
cash)
a. Current Ratio =
Current Assets
Current Liabilities
The higher the current ratio, the greater
the firm’s liquidity and its ability to
continue operations
L. RATIO ANALYSIS (CONTINUED)
b. Quick (Acid Test) Ratio:
Current Assets - Inventory
Current Liabilities
The Quick Ratio measures whether a firm has
sufficient assets that either are or can be
readily converted into cash to pay current
liabilities
2. Ratios That Measure Activity – Provide a
gauge of the firm’s operations and
operating efficiency
L. RATIO ANALYSIS (CONTINUED)
a. Inventory Turnover = Net Sales
Inventory
Higher turnover is generally better, but
turnover rates vary by industry
b. Average Collection Period
= Accounts Receivable
Annual Credit Sales per 360 Days
The longer the collection period, the more likely
it is that a firm will not be able to collect on all
of its accounts receivable
L. RATIO ANALYSIS (CONTINUED)
c. Fixed Assets Turnover = Net Sales
Net Fixed Assets
A measure of efficiency in the use of plant
capacity.
d. Total Assets Turnover = Net Sales
Total Assets
Sales volume as a percentage of assets – a
measure of operating leverage, the quantity of
sales that are produced from the firm’s investment
in assets
L. RATIO ANALYSIS (CONTINUED)
3. Ratios that Measure Profitability
a. Operating Profit Margin =
Net Operating Profit
Net Sales
Higher = Better, but must compare with
industry averages for consistency
b. Net Profit Margin = Net Income
Net Sales
Results of operations, financing, investing,
and taxes
L. RATIO ANALYSIS (CONTINUED)
c. Return on Equity = Net Income
Stockholders’ Equity
Measures efficiency of use of corporate
(shareholders’) capital.
4. Ratios Measuring Capitalization (Use of
Leverage)
a. Debt to Total Assets = Total Liabilities
Total Assets
Indicates the portion of corporate assets
financed by debt.
L. RATIO ANALYSIS (CONTINUED)
b. Long Term Debt to Total Capitalization =
Long Term Debt
Long Term Debt & Shareholders’ Equity
Indicates balance of permanent financing.
c. Debt to Equity = Total Liabilities
Total Stockholders’ Equity
An indicator of debt used to finance assets
and operations.
L. RATIO ANALYSIS (CONTINUED)
d. Times Interest Earned =
Earnings Before Interest, Taxes, and
Depreciation (EBITD)
Long Term Debt & Shareholders’ Equity
A measure of the firm’s ability to service debt.
e. Fixed Charge Coverage =
Earnings Before Interest, Taxes, and
Depreciation (EBITD)
Interest Charges & Lease Payments
A measure of the firm’s ability to service debt and
other fixed expenses.
L. RATIO ANALYSIS (CONTINUED)
5. Ratios That Measure Stock Value
a.
Price-Earnings Ratio
= Market Price of Common Shares
Earnings per Common Share
Shows the multiple of earnings per share of stock
price.
b.
Price to Book Ratio
= Market Price of Common Shares
Book Value per Share
Book value per share = total assets minus intangible
assets minus total liabilities minus preferred shares
outstanding – Measures the multiple of book value
per share of common stock
L. RATIO ANALYSIS (CONTINUED)
c. Dividend Payout Ratio
= Dividends Per Common Share
Earnings Per Common Share
An indicator of a firm’s ability to continue to
make dividend payments.