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 [...]