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Financial Analysis Ratios
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MeasuresPrimary type of MeasurementName(s)FormulaData typeGuidanceInterpretation
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Common Size RatiosPositionCommon Size - Balance SheetEach item ÷RatioN/AComparing a company's performance over time, or comparing the results of different companies, requires values that are comparable. Dollar values don't meet this requirement. Analysts deal with this is by converting all numbers to a relative percentage. Common size values do this by dividing ALL numbers in each statement by the same denominator. This means they are percentages.
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Total Assets
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PerformanceCommon Size - Income StatementEach item ÷RatioN/ASame as above
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Total Revenue
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PerformanceCommon Size - Cash Flow StatementEach item ÷RatioN/ASame as above
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Total Revenue
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Risk exposure due to solvency and/or liquidityPositionCurrent RatioCurrent Assets ÷ Ratio2 is idealA 2 means you have twice the value of current assets that you have of current liabilities = ability to pay debts twice over
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Current Liabilities
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PositionQuick Ratio/Acid TestCurrent Assets above Inventory ÷ Ratio1 is idealNot all current assets can be sold quickly (nobody wants your dirty cleaning supplies for example). It's like the current ratio, but measures only the most liquid assets (those listed above Inventory)
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Current Liabilities
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PerformanceAccounts Receivable Turnover365 ÷ (Net Sale on Credit ÷ in daysLower is betterThis shows how long it takes you to collect your receivables in the period. Lower means it takes a smaller fraction of the year for you to collect your money. This means you don’t have lots of your cash in the hands of customers who aren’t paying = better use of cash
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Average Accounts Receivable)
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PerformanceInventory Turnover365 ÷ (Cost of Goods Sold ÷ in daysLower is betterThis measures the fraction of a year that it takes to sell through your inventory once. Less time means you get your hands on your money faster (and can order more inventory sooner and make more money).
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Average Inventory)
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PerformanceOperating CycleInventory Turnover +in daysLower is betterThese two turnovers together measure how long it takes to buy goods, sell them, and then collect the money and start the cycle again. This is one business (or operating) cycle. The lower the number, the faster you can do it, and that means the more often you can do it in the year. This of course means more sales and less risk of insolvency.
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Accounts Receivable Turnover
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Ability to Generate Cash/ Borrowing CapacityPosition/ PerformanceCash Flow to Current DebtCash from Operations ÷RatioHigher is betterIndicates the amount of cash to pay off current debt that is generated from operating activities. The ratio provides a better picture of liquidity than using the current ratio because it uses cash provided by operating activities over the year rather than the year-end asset balance.
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Average Current Liabilities
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Position/ PerformanceCash Flow to Total DebtCash from Operations ÷RatioHigher is betterIndicates the amount of cash to pay off total debt that is generated from operating activities. The ratio is the cash based counterpart to the debt ratio.
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Average Total Liabilities
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PerformanceCash Return on SalesCash from Operations ÷RatioHigher is betterCash return on sales indicates how quickly sales are turned into cash. The company is efficient at turning sales into cash the closer its cash return on sales is to its profit margin.
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Net Sales
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PerformanceCash Flow per ShareTotal Cash Flow ÷Dollar valueHigher is betterCash flow per share indicates the cash flow generated for each common share. This is useful for investors because they like to compare all values relative to the price of a share of stock.
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Common Shares Issued
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Borrowing CapacityPositionDebt RatioTotal Liabilities ÷RatioLess than 50% is idealThis measures the percentage of all the assets that are financed with debt. The higher the number, the greater the risk of insolvency due to higher interest rates, mortgage payments, etc.
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Total Assets
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PerformanceTimes Interest EarnedEBITA ÷RatioHigher is betterThis measures a company’s exposure to changes in the interest rate. If they can pay their interest charges many times over, they’re ok.
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Interest Expense
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Profitability/ EfficiencyPerformanceReturn on AssetsOperating Income ÷RatioHigher is betterThis is also a measure of efficiency. Compares the size of your profit to the value of all the business’s assets. The larger the number, the more money you are able to make for each dollar the business has invested in assets. If it’s low, you have a lot of cash tied up to generate very little profit = low efficiency
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Average Assets
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PerformanceReturn on EquityNet Income ÷RatioHigher is betterThis is also a measure of efficiency. Compares the size of your profit to the size of your equity. The larger the number, the more money you are making for each dollar of your investment in the business = more efficient investment for you
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Average Equity
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PerformanceReturn on SalesNet Income ÷RatioHigher is betterThis is a measure of profitability or efficiency. It states what share of your sales is profit to you. It’s a measure of your ability to control costs and generate sales efficiently.
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Net Sales
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PerformanceEarnigns per Share (EPS)Net Income ÷Dollar valueHigher is betterThis is a measure of profitability per share. Again, investors like per share data as it makes it easier to compare profit to the value of the stock they own.
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Common Shares
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ratios
common size