Financial Ratio and Excel Function Reference Guide
INCOME STATEMENT ANALYSIS
(Profitability and efficiency indicators)
(* indicate that average balances are usually used to calculate the ratio, i.e. of opening and closing balances)
Term/Ratio
Gross Profit Margin
EBITDA Margin
Operating Margin
Net Margin
Return on Equity
Return on Assets
Return on Capital
Employed
Earned Value Added
Definition or Use Calculation Target Benchmark
Difference between Gross Profit/Sales Varies considerably
purchase and/or by industry and
conversion costs and volume.
the selling price. 40% or more is
generally good.
For evaluating cash flow EBITDA/Sales Varies considerably
flow through. by industry.
15% or more is
good.
For evaluating earnings Operating Income/Sales Varies considerably
flow through from by industry.
continuing operations. 10% or more is
good.
For evaluating bottom Net Earnings/Sales Varies considerably
line earnings flow by industry.
through to the 5% or more is good.
shareholder.
Compares bottom line Net 10% should be the
earnings to the amount Earnings/Shareholders minimum for large,
of equity in the Equity* stable companies.
company as a proxy of 18% minimum for
original shareholder small, private
return. companies.
Compares bottom line Net Earnings/Total 8% is a good target.
earnings to assets to Assets
eliminate financial
leveraging differences
between companies.
More pure way of NOPAT/Capital WACC is a good
comparing operating Employed* target for
returns without comparison;
financing 10% or higher.
considerations.
The amount of excess NOPAT-Notional Cost of Positive number
earnings over and Capital indicates the
above a notional cost of where, creation of
capital charge. Notional Cost of Capital shareholder value, a
= Capital Employed x negative number
WACC) the destruction of
shareholder value.
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Earnings Per Share The amount of earnings Net Earnings/Weighted Calculated on a both
attributable to each Average No. of Shares a basic and diluted
share. basis.
OPERATIONS ANALYSIS

(Productivity indicators)

Term/Ratio Definition or Use Calculation Target Benchmark

Sales Productivity Measures that correlate E.g. Varies by industry
sales to key selling Sales/employee; and business.
resources. Sales/store Benchmark yourself
against your peer
set.
Operations Productivity Measures that correlate E.g. Varies by industry
sales to key operational Defect rates; and business.
resources. Customer complaints; Benchmark yourself
Asset turnover= against your peer
sales/total assets* set.
Average Collection How quickly receivables Receivables/Average Compare against
Period are collected. Daily Sales credit policy, for
most companies this
Average Daily Sales = is 30 days.
Sales/365 days
Inventory Turnover How quickly inventory Cost of Sales/Inventory* Varies by industry.
is converted,
distributed, and sold.
Days Inventory Calculates how many Inventory/Average Daily Varies by industry,
Outstanding days of inventory you Purchases but generally 4x or
currently have on hand. more is a good
Average Daily Purchases target.
= Cost of Sales/365 days
Days Payables Calculates how many Payables/Average daily Compare against
Outstanding days on average you purchases your standard
take to pay suppliers. creditor terms, 30
days is a common
benchmark, but
many companies
achieve 40-50 days.
Cash Conversion Cycle Calculates, in days, the +Days Sales Outstanding Varies by industry.
amount of the working +Days Inventory The goal is to
capital financing Outstanding minimize as much as
requirement. -Days Payables possible. 30-50 days
Outstanding for many industries
=Cash Conversion Cycle with inventory,
selling on credit.

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BALANCE SHEET ANALYSIS

(Liquidity and leverage indicators)

Term/Ratio Definition or Use Calculation Target Benchmark

Current Ratio Evaluates short term Current Assets/Current Min 1.3:1
liquidity position. Liabilities Ideal 2:1 or more
Quick Ratio The most conservative (Current assets- Depends on the
view of very short term Prepaids- business.
liquidity. Inventory)/Current 0.7:1 is fine.
Liabilities
Capitalization Ratio Evaluates the degree of Funded Debt/Capital 0.75 is high.
financial leverage in the Employed 0.4-0.6 is fine for a
business (i.e. how much Where, mature, stable
debt is used to finance Capital Employed is your company.
the business). Funded Debt + Equity <0.4 for all others.
Debt to Equity Ratio Evaluates the degree of Total Liabilities/Equity 1:1 is conservative.
financial leverage in the 3:1 is generally the
business (i.e. how much limit.
debt and total liabilities
are in relation to
equity).
Interest Coverage Ratio Evaluates the EBIT/Interest Expense 1.5 is the minimum.
companys ability to 5 or > is good.
meet debt costs.
Debt Service Coverage Evaluates the EBIT/(Interest Expense + 1.3 is the minimum.
companys ability to Scheduled Debt 5 or> is good.
meet total debt Repayments)
obligations.
Funded Debt to EBITDA Measure of earnings Funded Debt/EBITDA Most senior lenders
financial leverage. will only lend up to a
maximum of 2:1.
Book Value Per Share Calculates the amount Shareholders Proxy for the sales
of shareholders equity Equity/No. of Shares of assets of the
on the Balance Sheet Outstanding company on a going
attributable to each concern basis.
share outstanding .
Tangible Book Value Same as Book Value Per (Shareholders Equity- A proxy for the
Per Share Share, only it excludes Intangible Assets)/No. of liquidation value of
Intangible Assets as Shares Outstanding the company.
these are often illiquid
and not easily financed.
Intangible Assets Assets that you cant touch or feel, stuff like brands, trademarks, patents,
customer lists and relationships Internally generated intangible assets
can be set up on the Balance Sheet if they meet certain criteria.

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Goodwill Represents the excess cash flow earned over and above the return
generated on the other recorded tangible and intangible assets. Goodwill
only gets recorded on the Balance Sheet during a business combination
(i.e. an acquisition). Internally generated goodwill is NOT recorded on the
Balance Sheet.
CASH FLOW ANALYSIS

(Coverage and cash flow indicators)

Term/Ratio Definition or Use Calculation Target Benchmark

Operating Cash Flow Cash flow from Indirect Method starts Operating cash flow
operations and changes with net earnings and should be higher
in working capital. then: than net earnings.
1. Adjusts for non-cash Watch for changes
charges on the in working capital
Income Statement that outpace
2. Adjusts for changes in earnings.
incremental changes
in working capital
Investing Cash Flow Cash flow from +Proceeds from the sale Situation specific,
investing activities. of assets or other lines but compare
Evaluate how the of business Depreciation to
company is spending -capital expenditures Capital Expenditures
capital to sustain or and cash acquisitions of to assess whether
grow the business. investments in other the company is
businesses growing capacity or
deferring capital.
Financing Cash Flows Cash Flows from +Debt issuances Situation specific.
financing activities. +Share issuances
Evaluate how the -Debt repayments
Executives and the -Share repurchases
Board is allocating Free -Dividends
Cash Flow.
Maintenance Capex Capital expenditures Sometimes hard to Compare against
that sustain the existing identify, assume depreciation. A
capacity of the maintenance unless lower spend might
business. otherwise disclosed. indicate deferred
capital spending.
Growth Capex Capital expenditures New plants or stores, The goal is to make
that grow the operating business acquisitions. accretive
capacity of the investments. I.e.
company. increases Free Cash
Flow and EPS in the
future.
Unlevered Free Cash Calculates the amount +Operating cash flow If you used an
Flow of cash available for unlevered cash flow

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Term/Ratio Definition or Use Calculation Target Benchmark

both debt and equity +Interest expense (net in your analysis, the
stakeholders. Its useful of tax) appropriate discount
for valuation and -Maintenance Capex rate is your WACC.
investment analysis as =Unlevered Free Cash
it separates the
operating analysis from Or, EBITDA-working
financing analysis. capital-capex
Levered Free Cash Flow Calculates the amount +Operating Cash Flow If you used this cash
of cash flow remaining -Maintenance Capex flow in investment
for shareholders. This -Debt Repayments or valuation
represents excess cash =Levered Free Cash Flow analysis, the
flow from the business appropriate discount
over which the rate is the
Executive and Boards shareholders
must make capital expectation of
allocation decisions. return.

INVESTMENT ANALYSIS

(Valuation and market value indicators)

Term/Ratio Definition or Use Calculation Target Benchmark

P/E Ratio Used as a valuation rule Current Stock Price/EPS P/Es below 10 are
of thumb to compare generally cheap.
different companies. EPS can either be on a The S&P has a long
TTM (trailing twelve term historical
months) or a Forward average P/E Ratio of
basis using analyst 18. The higher the
estimates. P/E, the greater the
expectation of
growth (or
overvaluation).
Earnings Yield (E/P This is the inverse of EPS/Current Stock Price 10% is the starting
Ratio) the P/E ratio and point for a NO
coverts earnings in a growth business.
percentage to give you Growth companies
sort of a market-based will be lower than
Return on Equity this.
calculation.
PEG Ratio This ratio is used to P/E Ratio/Growth Rate A PEG Ratio>1
evaluate the valuation suggests an
against the expected overvaluation, a PEG
growth rate to assess Ratio<1 suggests an
valuation. undervaluation.

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Term/Ratio Definition or Use Calculation Target Benchmark

Dividend Yield Calculates the Dividend Per 1-4% is common for
investors income Share/Current Stock most blue chip
return based on the Price stocks. Keep in mind
current trading price. many blue chip
companies aim to
increase their
dividend by 5-10%
each year.
Dividend Coverage Calculates how safe the Dividend Per Stocks paying out
Ratio dividend is, whether its Share/Current Stock more than 90% of
at risk of a cut, or Price their earnings are at
alternatively likely to be greatest risk of
raised. cutting their
dividend. 30-90% Is
common depending
on the growth. Less
than 30% often
leaves room for a
dividend hike.
Enterprise Value The value of the Market Capitalization + Think of it kind of
business on a debt free Value of Debt like the value of
basis. Often used in assets. It allows the
acquisitions of assets. acquirer to separate
financing decisions.
EBITDA Multiple Another common Enterprise Value/EBITDA A rule of thumb is
valuation metric that is that a business is
often used for a variety worth 8 X as a
of purposes. starting place and
you adjust upward
or downward from
there for the specific
circumstances.
Price to Book Ratio Compares the premium Market A good metric to use
or discount inherent in Capitalization/Book to quantify the
the stock price relative Value of Equity inherent goodwill in
to the book value of the business when
equity as reported in its >1.
the Financial When its. <1 may
Statements. imply a low
valuation or
solvency concerns.

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Term/Ratio Definition or Use Calculation Target Benchmark

Price to Sales Ratio Generally useful for Market Rule of thumb
companies that have Capitalization/Sales valuation ratio with
not yet achieved highly variable
profitability yet, i.e. application.
early stage growth
companies.
Beta Measure of volatility Covariance between the A Beta of 1 implies
return on a security and that the stock is well
the market returns/ correlated to
Variance on market movements in the
returns overall stock market.
High betas imply
more volatility.

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EXCEL FUNCTIONS

Excel Function Syntax When you use it

AVERAGE =AVERAGE(range) To add up a range of numbers.

CHOOSE =CHOOSE(option to pick, option The choose function is really
1, option 2, option 3) handy when you want to set up
a switch in an Excel model.
For example, if you have 6 sets
of assumptions, you could use a
CHOOSE function to update the
model dynamically just by
selecting which set of
assumptions you want to run.
COUNT =COUNT(range) To count the number of items in
a given range
COUNTIF =COUNTIF(range, criteria) To only count items in a given
range that meet a given criteria.
IF =IF(condition, if true give me To make your model and
this, if false give me this) analysis dynamic (which means
having an ability to update in
real time), the use of this
common logic function is very
common. It allows you to
consider two possibilities. If
you use an IF function within an
IF function, you can consider
three possibilities (though I
wouldnt recommend use IF in
the same formula more than
twice).
INTRATE =INTRATE(settlement date, Useful for calculating the
maturity date, investment, interest you will receive or
amount received at maturity) borrow on short term basis
when transacted at a discount.
IRR =IRR(range) To determine the internal rate
of return for a range of cash
flows. The first cash flow is
assumed to happen at time
zero.
MAX =MAX(range) To determine the maximum
value in a range of cells.
MIN =MIN(range) To determine the minimum
value in a range of cells.
NPV =NPV(discount rate, range) To determine the present value
of a stream of cash flow.

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PMT =PMT(interest rate, number of
periods, - present value, [future
value], [1 beg of year; 0 end of
year])
PV =PV(interest rate, number of
periods, payment [future value],
[1 beg of year; 0 end of year]
RATE =RATE(number of periods,
payment, present value, [future
value], [1 beg of year; 0 end of
year])
ROUND =ROUND(value, number of
digits)
SUM =SUM(range)
SUMIF =SUMIF(sum range, criteria)
XIRR =XNPV(discount rate, value
range, date range)
XNPV =XIRR(value range, date range)
Remember that Excel sees each
column of cells as separate
years.
To calculate the payment based
on a constant stream of
payments and/or a [future sum
of money].
To calculate the present value
of a stream of cash flow
(payment) and/or a [future sum
of money].
To calculate the interest rate of
a stream of cash flow and/or a
[future sum of money].
To round numbers off. Use a
positive number to add decimal
places. Use a negative number
to round for nominal,
thousands, or millions.
To add up a range of numbers.
Used all over the place.
To add up numbers in a given
range that meet a certain
criteria.
To calculate the precise net
present value by attaching the
cash flow amounts to specific
dates. Very helpful when you
have off calendar cash flows or
periods that are less than
annual.
To calculate the precise internal
rate of return by attaching the
cash flow amounts to specific
dates. Very helpful when you
have off calendar cash flows or
periods that are less than
annual.
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