Useful Financial Ratios

For a class, I was given the task of putting together and analyzing some financial ratios for a company of my choosing. This assignment proved more useful than I anticipated, and I’d like to share the idea with you.

This is perhaps the first time fundamental analysis made sense to me. Compiling all of the following financial ratios, for a publicly traded company, for the last 4 years (because such data is freely available on Yahoo Finance) or quarters, gives the observer a pretty good view of where the company is going.

More as a reminder to myself than anyone, I’d like to list some useful financial ratios here, and come back to them the next time I perform fundamental valuation of a company.

Profitability ratios

Profit margin (net profit as percent of revenue)

return on assets: net income / average total assets

price-to-sales ratio: price per share / annual sales per share

price-to-book ratio: rice per Share / Book Value per Share\

Dividend yield: Dividend per Share / Price per Share

Dividend payout ratioDividend / Net Income

Return on equity: Net Income / Average Stockholder Equity

Liquidity ratios

current ratio: current assets / current liabilities

quick ratio: (Current Assets – Inventory) / Current Liabilities

Account Receivables turnover ratio

Liquidity vs solvency: liquidity is the short-term concept, solvency is long-term. Liquidity means ability to meet short-term cash needs, such as payroll. Solvency means being long-term commercially viable.

Solvency ratios

average collection period

inventory turnover ratio

average sales period

The solvency ratio (a company’s after-tax net income divided by its total debt obligations)

Market valuation ratios

debt to equity ratio: I believe, debt / equity

Interest coverage ratio: EBIT / Interest Expense

Earnings per share. This info is often pre-computed for you, per fiscal quarter

Market valuation. Cost per share times shares outstanding. This tells you the type of company: large, mid or small? The company plays by different rules based on its size.