Financial Ratio Analysis

Market to book ratio (market to book value of equity). A measure of market value.
Market to book ratio = market value per share / book value per share.
Market to book ratio = (price per share x number of shares outstanding) / shareholders’ equity (book value).

Market Value Added (MVA). MVA is a measure of the difference between the market value of a company and the debt and equity capital invested in the company. Also see Economic Value Added (EVA) and Future Growth Value (FGV). EVA was devised by Stern Stewart & Co.
MVA = market value of equity + market value of debt – economic book value.

Net asset turnover. A measure of efficiency or activity.
Net asset turnover = sales / (total assets – current liabilities).

Net profit margin. See EBITDA margin.

No credit period. A measure of liquidity.
No credit period = (cash + near cash) / average daily cash running costs.

NOPAT margin. ‘after taxes’ measure of the price premium that the organisation’s products or services can commend in the marketplace and the efficiency of the organisation’s procurement, production, sales and distribution processes.
NOPAT margin = net income + interest x (1 – effective tax rate) / sales.

Operating cash flow ratio. A measure of liquidity or leverage.
Operating cash flow ratio = cash flow from operations / current liabilities.

Operating profit margin. A measure of the price premium that the organisation’s products or services can commend in the marketplace and the efficiency of the organisation’s procurement, production, sales and distribution processes.
Operating profit margin = income from operations / sales.

Payout ratio. See dividend payout ratio and retention ratio.

PPE turnover. A measure of the management of long-term assets.
PPE turnover = sales / PPE. Where PPE is net fixed assets.

Price earnings ratio. A measure of market value.
Price earnings ratio = share price / earnings per share.

Profitability ratios. See Return on Assets, Return on Equity, gross profit margin and EBITDA margin.

Profit margin. A measure of the price premium that the organisation’s products or services can command in the marketplace and the efficiency of the organisation’s procurement and production processes.
Profit margin = net income / sales.

Quick ratio. A measure of short-term solvency or liquidity.
Quick ratio = (current assets – inventory) / current liabilities.
Quick ratio = (cash + marketable securities + accounts receivable) / current liabilities.

Rate of return. A measure of market value.
Rate of return = ((price per share at end of period + dividends received) / price per share at beginning of period) – 1.

Retention ratio. A measure of retained earnings to income.
Retention ratio = Addition to retained earnings / net income.
Retention ratio = 1 – dividend payout ratio.

Receivables turnover. A specific measure of working capital management.
Receivables turnover = sales / accounts receivables.

Return on Assets (ROA). ROA is a measure of performance, it indicates how well (productively) the organisation’s assets are being used overall.
ROA = net income / assets.

Return on Assets (ROA) decomposition. ROA is affected by net profit and asset turnover. Also see Return on Equity (ROE) decomposition.
ROA = net profit margin / asset turnover.
ROA = (net income / sales) x (sales / assets).

Return on Equity (ROE). ROE is a measure of performance, it indicates how well (productively) shareholders’ funds are being used.
ROE = net income / shareholders’ equity.

Return on Equity (ROE) decomposition. ROE is affected by how well (productively) the organisation’s assets are used and the relative value of shareholders’ equity to total assets (leverage). Also see Return on Assets (ROA) decomposition.
ROE = return on assets (ROA) x leverage.
ROE = (net income / assets) x (assets / shareholders’ equity).

Return on Invested Capital (ROIC).
ROIC = after tax operating profit / invested capital.

Stock turnover. See inventory turnover.

Sustainable growth rate. A measure of growth potential on consistent gearing levels. Download our template for the sustainable growth rate.
Internal sustainable growth rate = ROE x retention ratio.
Internal sustainable growth rate = ROE x (1- dividend payout ratio).
Sustainable growth rate = ROA x retention ratio / (1 – ROA x retention ratio).

Taffler’s Z-Score. Due to proprietary interests the values of C0 to C4 have not been made publicly available.
Z = C0 + C1 R1 + C2 R2 + C3 R3 + C4 R4
Where C0 is a constant and C1 to C4 are weightings given to the ratios R1 to R4; and where
R1 = profit before tax / current liabilities
R2 = current assets/total liabilities
R3 =current liabilities / total assets
R4 = no credit interval*
* Defined as (immediate assets – current liabilities) / (operating costs – depreciation).

Times Interest Earned (TIE). A measure of long-term solvency.
TIE (earnings basis) = EBIT / interest.
TIE (cash basis) = (cash flow from operations + interest paid + taxes paid) / interest paid.

Tobins Q.
Tobins Q = market value / replacement cost of assets.
Tobins Q = market value / book value of assets.

Total assets to equity. A measure of long-term debt and solvency.
Total assets to equity = total assets / shareholders’ equity.

Total asset turnover. See asset turnover.

Total coverage. A measure of long-term debt and solvency.
Total coverage (cash basis) = (cash flow from operations + interest paid + taxes paid) / total debt service (interest + principal paid).

Total debt ratio. A measure of long-term solvency.
Total debt ratio = (total assets – shareholders’ equity) / total assets.

Total interest bearing debt to assets. A measure of long-term debt and solvency.
Total interest bearing debt to assets = total interest bearing debt / total assets.

Total interest bearing debt to equity. A measure of long-term solvency.
Total interest bearing debt to equity = total interest bearing debt / shareholders’ equity.

Total liabilities to assets. A measure of long-term debt and solvency.
Total liabilities to assets = total liabilities / total assets.
Note: This maybe beginning, ending or average value for total assets.

Total liabilities to equity. A measure of long-term debt and solvency.
Total liabilities to equity = total liabilities / shareholders’ equity.
Note: This maybe beginning, ending or average shareholder equity.

Total long term debt to total capital. A measure of long-term debt and solvency.
Total long term debt to total capital = total long term debt / (total long term debt + shareholders’ equity).

Working capital turnover. A measure of efficiency or activity.
Working capital turnover = sales / average (current assets – current liabilities).

Pages: 1 2

Business Diagnostics

© 2004 code3indigo Pty Limited
T/A c3i Business Diagnostics

Designed and maintained by webziiq