Archive about 'Interpretation of Financial Statements'
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:
1.Add [...]
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 [...]
Profitability Ratio:Gross Profit Margin
Continued from my last article, we now look at the financial ratio for assessing the profitability of a company.
This type of financial ratio should be able to measure the bottom-line results or the profitability of the company.
One typical major Profitability ratio is:
The GROSS PROFIT MARGIN
FORMULA
Gross Profit / Net Sales
MEASURE WHAT
Profitability of trading and mark-up
SCORE [...]
Liquidity Ratio: Current Ratio
Liquidity means the firm’s ability to satisfy its short-term obligations as they come due.
One of the common financial ratio is the
The CURRENT Ratio.
FORMULA
Current Assets /Current Liabilities
MEASURE WHAT
Measure the ability of the company to meet short term obligations namely paying the current liabilities like accounts payable and others. A test of solvency / a [...]
March 13, 2010
- In Accounting, Explain What Is Recoverable Amount
- In Accounting, What Do We Mean By Retained Profits
February 28, 2010
- What are the Accounting Treatment and give examples of Non-Adjusting Events After The Balance Sheet Date
- Please Explain What Are The Underlying Accounting Principles That At Least Need To Be Follow When Presenting Financial Statements under FRS 101
January 27, 2010
January 25, 2010


