RATIOS

RATIOS

1. A window into a company’s financial statements.

   • Accounting Tricks
     • Bill-and-hold
       • buy large quantities of products put off paying for them until these are being sold.
   • The relationship of one number to another.
     • Four Categories
       • profitability
         • Help you evaluate a company’s ability to generate profits.
           • GROSS MARGIN
             • shows the basic profitability of the product, before expenses or overhead are added in.
           • OPERATING PROFIT MARGIN (EBIT)
             • company’s ability to generate profit.
           • NET MARGIN
             • how much out of every sales dollar it gets to keep after everything else has been paid for—people, vendors, etc, and so on.
           • RETURN ON ASSETS (ROA)
             • Percentage of every dollar invested in the business was returned to you as profit.
           • RETURN ON EQUITY (ROE)
             • What percentage of profit we make for every dollar of equity invested
           • Complex profitability ratios
             • Return on net assets (RONA), Return on total capital (ROTC), Return on invested capital (ROIC) Return on capital employed (ROCE).
       • Leverage
         • How company uses debt
           • OPERATING LEVEAGE
             • Reducing variable costs
           • FINANCIAL LEVEAGE
             • The extent to which a company’s asset base is financed by debt
           • DEBT-OF.EQUITY
             • How much debt the company has for every dollar of shareholders’ equity
           • INTEREST COVERAGE
             • How much interest it has to pay every year—
       • Liquidity
         • company’s ability to meet all its financial obligations
           • CURRENT RATIO
             • company's ability to pay short-term and long-term obligations.
           • QUICK RATIO
             • company’s ability to meet its short-term obligations with its most liquid assets
       • Efficiency.
         • how efficiently you manage certain key balance sheet assets and liabilities.
           • (DII) Inventory days
             • how fast it flows matters a lot
           • DAYS SALES OUTSTANDING
             • is also known as average collection period and receivable days.