working capital
current assets- current liabilities
- the capital of a business that is used in it day-to-day trading operations
- liquidity ratio
current ratio
current assets/current liabilities
- measures a company’s ability to pay short term and long term assets
- dont want this less than 1 (means working capital is negative) but also don’t want too high (could mean they have a lot of inventory)
- liquidity ratio
inventory turnover
COGS/average inventory
- shows how many times inventory is sold and replaced within a given period of time
- want this to be high (strong sales)
- liquidity ratio
days in inventory
365/inventory turnover
- measures the average number of days that a company holds its inventory before selling it
- want this low-selling items quickly
- liquidity ratio
accounts receivable turnover
net credit sales/average net accts receivable
- the number of times a year a company collects its average accounts receivable
- want this high (means they are more likely to collect)
- liquidity ratio
average collection period
365/accounts receivable turnover
- the average number of days it takes to collect accounts receivable
- want this low (means you collect them quickly)
- liquidity ratio
debt to assets ratio
total liabilities/total assets
- tells you the % of total assets that is financed by creditors
- you want this low (less liabilities to pay off)
- solvency
times interest earned
(net income + income tax expense+ interest expense)/interest expense
- measures a company’s ability to meet its debt obligations
- want this higher (less of a risk to creditors in terms of solvency)
- not expressed as a percent
- solvency
free cash flow
net cash provided by operating activities-capital stock-cash dividends
-the money the company generates after paying off what it owes
-high is good
solvency
earnings per share
net income-preferred dividends/weight average shares outstanding
- profitability
- the amount you make per share
- you want this to be high
price earnings ratio
market price per share/earnings per share
- profitability
- how much investors are willing to pay per dollar of earnings (if it is 20 they are willing to pay $20 per $1 of earnings that the co generates)
- better indicator of the value of stock
- if higher than the market value this suggests the market is expecting big things over the next few months or years
gross profit rate
gross profit/net sales
- profitability
- measures the portion of all sales that are kept as profit (money left as revenues after accounting for COGS)
- want this to be high
profit margin
net income/net sales
- profitability
- measure the amount of net income earned with each dollar of sales generated by the company
- want this high
return on assets
net income/average total assets
- profitability
- measures the percentage of profit earned in relation to overall resources
asset turnover
net sales/average total assets
- the ratio of the value of a company’s sales relative to the value of its assets
- indicator of the efficiency with which a company is using its assets
- higher is better
payout ratio
cash dividends declared on common stock/net income
- profitability
- determines the sustainability of a company’s dividend payments (what % of a company’s income is paid out as dividends)
return on common stockholders equity
net income-preferred dividends/average common stockholders equity
- profitability
- shows how much profit each dollar of common SHE generates
- want this high
