FINANCIAL ANALYSIS TOOLS

Profit Ratios:
Measure the efficiency with which the company uses its resources. Useful for comparing performance
to competitors or benchmarking performance over time.

Gross Profit Margin = Sales Revenue COGS Return on Total Assets = Net Income
Sales Revenue Total Assets

Net Profit Margin = Net Income Return on Stockholders Net Income

Sales Revenue Equity = Stockholders Equity

Liquidity Ratios:
Measures the companys ability to meet short-term obligations. Results <1 suggest solvency problems.

Current ratio = Current Assets Quick Ratio (Acid Test) = Current Assets-Inventory
Current Liabilities Current Liabilities

Activity Ratios:
Measures how effectively the company is managing its assets.

Inventory Turnover = COGS Average Collection Period Accounts Receivable

Inventory or Days Sales Outstanding Total Sales/360
(DSO) =

Leverage Ratios:
Measures the balance between debt and equity, or the capital structure. Too little use of debt can suggest that stock is
being overly diluted; too great a use of debt increases risk to firm since bankruptcy can occur if firm is unable to make
principal and interest payments. Typical capital structures vary significantly by industry, so its useful to compare to
competitors or industry average. Some people prefer to look only at long term debt, while others include short-term debt
or total liabilities.

Debt-to-Assets Ratio = Total Debt Times-Covered Ratio = EBIT

Total Assets Total Interest Charges

Debt-to-Equity Ratio = Total Debt

Total Equity

Shareholder Return Ratios:

Measures return to shareholders from holding stock in the company.
Total Shareholder Returns =
Stock Price (t+1) - Stock Price (t) + Sum of Annual Dividends per Share
Stock Price (t)

Price-Earnings Ratio = Market Price per Share Dividend Payout Ratio = Annual Dividends per Share
Earnings per Share After-tax Earnings per
Share

Dividend Yield = Dividend per Share

Market Price per Share

Cash Flow:
Measures cash available to the firm, available for investment. If this figure is less than proposed expenditures, firm will
either require external financing or must curtail investments.
Internally Generated Cash Flow =
Profits after Interest, Taxes and Dividend Payments + Depreciation