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Financial Ratios - Leverage LAMP
Leverage Ratios
Debt Ratio |
Debt Ratio = Total Debt / Total Assets |
measures the relative amount of company's assets that are financed by Debt |
High Debt Ratio = Higher financial risk |
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Debt Equity Ratio |
D/E Ratio = Total Debt / Total Common Equity |
ratio of firm's total liabilities to Equity Capital |
High D/E Ratio indicates higher risk to the shareholders |
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Equity Multiplier |
Equity Multiplier = Total Assets / Total Common Equity |
extent to which firm's assets are greater than the shareholder's equity |
If EM is 5, it means investment in total assets is 5 times the investment by Equity Shareholders |
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Market Debt Ratio |
Market Debt Ratio = Total Debt / (Total Debt + Market Value of Equity) |
ratio between the market value of debt to the market value of debt and equity |
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Liabilities to Assets Ratio |
LAR = Total Liabilities / Total Assets |
show the share of total liabilities out of total assets |
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Interest Coverage Ratio |
ICR = Operating Income / Interest Expenses |
shows how easily a firm can pay its interest expenses |
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Debt Service Coverage Ratio |
DSCR = Operating Income / Total Debt Service |
reveals how easily a firm can pay its debt obligations |
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Leverage Ratios or Debt Management Ratios indicate the extent to which debt financing is used by a firm. These ratios measure long-term solvency of a firm.
Liquidity Ratios
Current Ratio |
Current Ratio = Current Assets / Current Liabilities |
ratio of current assets and current liabilities. It measures the liquidity stand of a firm |
Ideal ratio is 2:1 or more. A low CR, say 0.5:1, means company has Rs.50 for every Rs.100 of debt and can't cover it short-term debts |
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Quick Ratio |
Quick Ratio = Quick Assets / Current Liabilities |
also know as Acid Test Ratio |
Quick Ratio = (Current Assets - Inventories) / Current Liabilities |
a measure of short-term solvency of a firm |
Reliable because assets forming part of quick assets are easily convertible into cash in short notice. Quick ratio of 1:1 represents satisfactory financial situation |
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Cash Ratio |
Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities |
measures a firm's ability to pay off its short-term liabilities with cash and cash equivalents |
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Operating Cash Flow Ratio |
OCFR = Operating Cash Flow / Current Liabilities |
measure of the number of times a firm can pay off its current liabilities with the cash generated in a given period |
Liquidity Ratios are used to assess the short-term solvency position of a firm i.e. firm's ability to pay short term obligations out of current/liquid assets.
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Assets Management (Performance) Ratios
Inventory Turnover Ratio |
ITR = Cost of Goods Sold / Inventory |
measures how firm's investment in inventory is being used to generate sales |
shows how rapidly inventory is turning into receivables through sales |
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Days Sales Outstanding |
DSO = (Receivables x No. of days) / Total Credit Sales |
used to evaluate a firm's ability to collect its sales in timely manner |
It is a measure of quality of debtors as It shows the average length of time that a firm takes to realize in cash after credit sales has been made |
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Receivables Turnover Ratio |
RTOR = Annual Credit Sales / Accounts Receivables |
indicates the no. of times the firm collects its account receivables during a year |
Higher RTOR, higher the efficiency of management assets |
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Fixed Assets Turnover Ratio |
FATOR = Sales / Net Fixed Assets |
measures the effectiveness of a firm's ability to make efficient utilization of fixed assets |
High FATOR indicates efficient utilization of fixed assets in sales generation |
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Total Assets Turnover Ratio |
TATOR = Sales / Total Assets |
measure of a firm's ability to make effective utilization of its total investment of generating sales revenue |
High TATOR indicates efficient utilization of total assets in sales generation |
Assets Management Ratios measure the effectiveness of a firm's asset utilization. Also Called Turnover Ratios or Efficiency or Performance Ratios because they indicate the speed with which assets are being converted into sales
Market Values Ratios
Price Earnings Ratio |
PE Ratio = Market Price (per Share) / Earnings (per Share) |
Ratio of company's stock price to the earnings per share |
can only be calculated for listed companies. Higher PE ratio = higher growth rate of the firm |
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Market to Book Value Ratio |
MBVR = Market Value (per Share) / Book Value (per Share) |
comparison of market value with book value of a firm |
IF MTBR<1, undervaluation; IF MTBR > 1, overvaluation; |
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Dividends Per Share |
DPS = Total Dividends / No. of Shares |
total dividends shared per unit share |
Higher DPS = much profitable for shareholders |
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Dividends Payout Ratio |
Payout Ratio = Dividends (per Share) / Earnings (per Share) |
the amount of divident that a company gives out to its shareholders out to its current earnings |
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Dividend Yield Ratio |
DYR = Dividend (per Share) / Share Price |
measures the amount of dividends attributed to shareholders relative to the market value per share |
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Market Values Ratios represent the ratios that relate the firm's stock price to its earnings and Stock Value per Share
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Profitability Ratios
Net Profit Margin |
NPM = Net Income / Sales |
measures net income per Rupee of sales; it measures the operating efficiency |
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Gross Profit Margin |
GPM = Gross Profit / Sales |
compares the gross profit to its net sales to show how much profit it makes after paying the cost of goods sold |
GPM = (Sales - Cost of goods sold) / Sales |
High GPM is a sign of good management efficiency to produce goods and services at low cost |
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Earning Power Ratio |
EPR = Operating Profit / Total Assets |
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Return on Assets |
RoA = Net Income / Total Assets |
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Return on Equity |
RoE = Net Income / Total Equity |
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Profitability Ratios measure the operating efficiency of a firm
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