Archive about 'Interpretation of Financial Statements'

Activity-Based Financial Ratio: Total Assets Turnover

Continued from my last article, we now look at the financial ratio for assessing the Activity of assets deployed by the company.

Essentially, the Activity ratios are able to measure the efficiency of managing or using of assets like:-

 total assets.

   accounts receivable,

 inventory,

  accounts payable, and

 
 
TOTAL ASSETS TURNOVER:

FORMULA

Net Sales / Total Assets ( or [...]

Market-Based Financial Ratio: Dividend Yield

DIVIDEND YIELD:

FORMULA

Dividends per share / Market price per share

MEASURE WHAT

Share rate of dividend to shareholders based on market price

SCORE/VALUE

Higher ratio is better. Depends on performance of the company itself & objectives of Management as studies show higher yields can increase share prices

SALIENT POINTS TO NOTE

It is the cash rate of return by shareholders through dividend

Market-Based Financial Ratio:Net Asset Backing

NET ASSET BACKING ( NTA):

FORMULA

Ordinary shareholders’ equity / No of ordinary shares

MEASURE WHAT

Measure the assets backing per share

SCORE/VALUE

Higher the better. Say if a company’s share has a net tangible asset per share of $1.00, the number of equity share is 2million, it means that if we were to liquidate the company after paying off all the [...]

Market-Based Financial Ratio:Price Earning Ratio

PRICE EARNINGS RATIO (P/E) :

FORMULA

Market Price per Share of Common Stock / Earnings Per Share.

MEASURE WHAT

Evaluates the relative attractiveness of a company’s stock price. One of the quickest and easiest ways to determine if a stock is trading on an investment or speculative basis.

SCORE/VALUE

Different industries-different P/E ranges- technologies sell at 40 P/E while textile at [...]

Market-Based Financial Ratio:Earnings Per Share

Continued from my last article, we now look at the financial ratio for assessing the Market Value of a company.
Essentially, these Market Based financial ratios are able to relate the company performance to the market for its shares
EARNINGS PER SHARE (EPS):

FORMULA

Earnings Available to Common Shareholders / Number of Shares Outstanding.

MEASURE WHAT

Indicates the amount of profit [...]

Leverage Ratio:Net Interest Cover or Times Interest Earned

We now look at the financial ratio for assessing the LEVERAGE or gearing of a company.Essentially, the Leverage Financial ratio should be able to measure the amounts of  borrowed money being used by the firm.
 
Leverage Ratios are classified as either:-
 

Capitalization Ratios, focusing on how investments are financed; or

 

Coverage Ratios, focusing on the ability to service [...]

Leverage Ratio: Debts-Equity Ratio

Continued from my last article, we now look at the financial ratio for assessing the LEVERAGE or gearing of a company. Essentially, the Leverage Financial ratio should be able to measure the amounts of  borrowed money being used by the firm.
 
Leverage Ratios are classified as either:-
 

Capitalization Ratios, focusing on how investments are financed; or

 

Coverage Ratios, [...]

Leverage Ratio:Debt/Leverage/Gearing Ratio

We now look at the financial ratio for assessing the LEVERAGE or gearing of a company.
Essentially, the Leverage Financial ratio should be able to measure the amounts of  borrowed money being used by the firm.
Leverage Ratios are classified as either:-

Capitalization Ratios, focusing on how investments are financed; or

Coverage Ratios, focusing on the ability to service [...]

Profitability Ratio: Return on Assets

Another type of profitability ratio for assessing the profitability of a company is:
 
The RETURN ON TOTAL ASSETS (ROA % )

FORMULA

Net Profit After Taxes / Total Assets

MEASURE WHAT

Indicates how well assets are used to create wealth, regardless of capital structure. Profitability of operations management

SCORE OR VALUE

 
Depends on industry
10-15% is reasonable Depends on industry
 

SALIENT POINTS TO NOTE:

    [...]

Profitability Ratio: Net Profit Margin

Another type of profitability ratio for assessing the profitability of a company is:
The NET PROFIT MARGIN

FORMULA

Net Profit After Taxes / Net Sales

MEASURE WHAT

Indicates overall business profitability. Shows how effective managers run the business.

SCORE OR VALUE

 
Approx 10-20% is good. Higher is better
>8% Strong
>6% Acceptable
<4% Evidence of weakness
<2% Weak
<0% Problems present

SALIENT POINTS TO NOTE:

 

1.     Comparing gross [...]