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Financial statement analysis Formulas
Liquidity Ratios
Current Ratio |
Current Assets:Current Liabilities |
Company's ability to meet its short term obligations |
Quick Ratio |
Liquid Assets:Current Liabilities |
Liquid assets not only excludes inventory |
Is the level of operating capital management to aggressive? Could lead to a loss in business. Also take into account level of operating risk and costs associated with short-term finance.
Debt Management Ratios
Debt ratio |
Total Debt / Total Assets |
Indicates extent to which company uses external financing to finance assets |
Interest Cover or Times interest earned |
EBIT / Interest |
Ability to meet interest obligation. EBITDA also used. |
Debt/Equity ratio |
Total Debt/Total Equity |
Gearing ratio of the company |
May need to restate balance sheet interest earning debt - Preference shares (redeemable=debt), deferred tax (do you have obligation to pay?), minority interest (equity), non-interest bearing debt (treat as debt or deduct)
Measures of Profitability
Profit Margin |
Profit / Turnover |
Calculated at different levels. Non-trade income should not be included |
Organisational profitability / Return on total assets |
EBIAT / Total Assets |
Return on enterprise as a whole |
Return on Equity |
Equity Earnings / Total Equity |
Difference between ROA and ROE is financial leverage |
Financial leverage |
ROA vs ROE |
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Asset Management / effectiveness
Inventory turnover |
Cost of sales / Average inventory (times) |
Effectively manage and control inventory. Poor turnover may indicate obsolete stock. (if you don't have COS use SALES) |
Inventory turnover rate |
Average inventory / COS x 365 (days) |
Length of time that inventory is on average held before it is sold. |
Days' sales in closing inventory |
Closing Inventory / COS x 365 (days) |
Days sales left from current closing inventory |
Debtor's turnover |
Credit Sales / Average Debtor (times) |
Evaluate application of Co's credit policy. Too short (sales will be lost) & too long (bad debts) & opp cost |
Debtors Collection period |
Average debtors / Credit sales x 365 (days) |
Reciprocal relationship with debtors turnover |
Days Sales in closing debtors |
Closing debtors / Credit sales x 365 (days) |
Sales represented by closing debtors |
Creditors payment period |
Average creditors / Credit purchases x 365 (days) |
Use COS if credit purchases not available. Too short (not utilising free credit) & too long (Bad reputation) |
Asset Turnover |
Net Sales / Assets |
Management ability to utilise assets effectively to generate sales. Can use different categories of assets |
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Investor's ratios / Market value ratios
Earnings per share |
Earnings / WANOS |
Dividend per share |
Dividend / No of shares in issue |
Earnings Yield |
EPS / Share price |
Dividend Yield |
DPS / Share Price |
Dividend cover |
EPS / DPS |
Price - Earnings Ratio |
Share Price / EPS |
High PE ratio can indicate investor's confidence and growth prospects. Repayment period in years of share investment. How much investors will pay per R1 of co's earnings. |
PEG |
PE / Expected sustainable growth |
2 companies taht are in different growth stages (eliminating growth impact) |
Nest Asset Value per Share |
NAV / WANOS |
Compare share price to NAV ps = trading at a discount? |
Shareholder return |
(Share price(end) - Share price(beg) + Dividend) / Share price(beg) |
Compare to ALSI return |
Dividend Payout ratio |
DPS / EPS |
Use to calculate sustainable growth |
Sustainable growth |
1 - Dividend Payout Ratio |
Cash Flow Statement
Cash flow to total debt |
CF from Operations / Total Debt |
Indicator of financial distress |
Cash ability to cover finance charges |
CF from Operations / Interest Paid |
Ability to pay interest from cash available |
Cash generating ability of co |
CF from Operations / Turnover |
Remember CASH IS KING! so any Cash Flow Ratio will be more reliable as to the true performance and going concern ability of the company
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