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.

Profits without prosperity

Currently reading: https://hbr.org/2014/09/profits-without-prosperity

It’s interesting how the argument is that share buybacks allows executives to collect handsome profits, without distributing the same with the working people. The article, and the video, explain the idea nicely.

I can’t help but wonder, what are the larger social, political and economic implications that will materialize because of the ongoing crisis? It seems likely that some changes – favorable or unfavorable to the general public – will attempt to be implemented during this tremulous time.

We already have the request to suspend constitutional rights due to the coronavirus:  https://www.rollingstone.com/politics/politics-news/doj-suspend-constitutional-rights-coronavirus-970935/  One can only wonder, what is coming next.