Sie sind auf Seite 1von 13

The Ratios:

Performance

Activity

Average Interest Rate

Asset Turnover

Book Value Per Share

Collection Ratio

Cash Flow to Assets

Inventory Turnover

Common Size Analysis

Financing

Dividend Payout Ratio

Debt / Asset Ratio

Earnings Per Share

Debt / Equity Ratio

Gross Profit Margin

Liquidity Warnings

Price/Earnings Ratio

Acid Test

Profit Margin

Interest Coverage

Return on Assets

Working Capital

Return on Equity

Average Interest Rate

(Interest Expense - Accounts Payable)

=

Liabilities

Indicates the average interest rate that a company borrows at.

Things to remember

This is a rough estimate, the ratio does not account for everything.

Using the before tax or after tax interest expense will produce different results.

There are several versions of this ratio, some people prefer to just use interest bearing liabilities such as the bonds and other short term loans. This formula won't give you the exact interest rate they are paying, but it is useful in an interest rate sensitive environment. And if you compare it to previous years then you are able to tell what rate the company had to take on more debt at. If you will notice from the balance sheet above, Cory's Tequila Co. doesn't have any long term debt - therefore you will not find an interest expense. What a great position to be in, practically debt free.

Book Value Per Share - BV

Stockholders Equity - Preferred Stock

=

Average Outstanding Shares

Somewhat similar to the earnings per share, but it relates the stockholder's equity to the number of shares outstanding, giving the shares a raw value.

Things to remember

Comparing the market value to the book value can indicate whether or not the stock in overvalued or undervalued.

During bull markets the stock price is more likely to trade significantly higher

than book value, and in a bear market the two value's may be close to equal.

For Cory's Tequila Co. $11,678 - $0 = $3.57 3271
For Cory's Tequila Co.
$11,678
- $0
= $3.57
3271

Book Value Analysis:

For the most part the book value really doesn't tell us a whole lot. Cory's Tequila Co. is trading at over $100 and the BV is only $3.57? What is up with that? Well BV is considered to be the accounting value of each share, drastically different than what the market is valuing the stock at. And the truth is that market and book value have nothing in common. Market value is what the investment community's expectations are and book value is based on costs and retained earnings. One situation where BV can be useful is if the market value is trading below the book value, this rarely happens, but if it does it could mean that the company is undervalued and might be an attractive buy.

Cash Flow to Assets

Cash from Operations

=

Total Assets

This ratio indicates the cash a company can generate in relation to its size.

Things to remember

Comparing to previous years is important, if the company's ratio is decreasing then they may eventually run into cash problems.

For Cory's Tequila Co. $4,438 = 0.30 $14,725
For Cory's Tequila Co.
$4,438
= 0.30
$14,725

Cash Flow to Assets Analysis:

Cash flow is often overlooked when people analyze a company. You can be a profitable company but if you don't have cash moving around to pay bills then you are really in trouble. It relates a company's ability to generate cash compared to its asset size. A ratio of 0.30 is quite good, Cory's Tequila Co. shouldn't run into any problems generating cash. When the ratio declines below 10% then there may be some cause for concern.

Common Size Analysis

=

Entity

Total Entity

Indicates the proportion of an asset/liability/expense is as a function of total assets/liabilities/revenue.

Things to remember

Compares what proportion that an expense reduces sales, especially useful when comparing previous years.

It is also useful when comparing similar companies of different sizes to see if

they have the same financial structure.

For Cory's Tequila Co.

1999

1998

Sales

100%

100%

COGS

35%

34%

Other Expenses

40%

41%

Net Income

17%

16%

Common Size Analysis:

Looking at the chart above you wouldn't really think that there is anything that useful to compare. That is because Cory's Tequila Co. has done an excellent job maintaining its pricing and expenditure strategy. Ideally you would like to see Cost of Goods Sold (COGS) go down each year because of increased efficiencies. It also tells us that every $1 of sales contributes 17 cents to the bottom line* of Cory's Tequila Co. - a healthy profit margin.

bottom line* Slang for net income or profit. This term comes from the structure of the income statement: profit is recorded on the bottom line of the sheet.

Dividend Payout Ratio

Yearly Dividend per Share

=

Earnings per Share

Indicates the proportion of earnings that are used to pay dividends to shareholders.

Things to remember

A reduction in dividends paid is looked poorly upon by investors, and the stock price usually depreciates as investors seek other dividend paying stocks.

A stable dividend payout ratio indicates a solid dividend policy by the company's board of directors.

Dividend Payout Analysis:

Cory's Tequila Co. dividend payout ratio is zero, in other words they do not pay a dividend to its shareholders. This is the case for most high growth firms, their profits are better spent by reinvesting in the firms activities rather than as a cash payout to shareholders. In fact a majority of corporations have elected to pay out less of their earnings as dividends, perhaps because corporate rates of return on reinvested capital are higher these days, but it could also be that dividends are doubly taxed in some jurisdictions.

Earnings Per Share - EPS

Net Income - Dividends on Preferred Stock

=

Average Outstanding Shares

The most widely used ratio, it tells how much profit was generated on a per share basis.

Things to remember

Diluted EPS means that the outstanding shares includes any convertible's or warrants outstanding.

If the company issues more shares then EPS are much harder to compare to

previous years.

For Cory's Tequila Co. = $0.65
For Cory's
Tequila Co.
= $0.65

EPS Analysis:

The earnings per share ratio is mainly useful for companies with publicly traded shares. Most companies will quote the earnings per share in their financial statements saving you from having to calculate it yourself. By itself, EPS doesn't really tell you a whole lot. But if you compare it to the EPS from a previous quarter or year it indicates the rate of growth a companies earnings are growing (on a per share basis). Cory's Tequila Co.'s EPS have increased almost 50% since last year, an excellent growth rate.

It should be noted that the 65 cents EPS is the "trailing" number, using the previous 4 quarters of earnings. Some analysts like to use "projected" EPS to analyze a stock's current value in respect to these estimates.

Gross Profit Margin

Revenue - Cost of Goods Sold

=

Revenue

Indicates what the company's pricing policy is and what the true mark-up margins are.

Things to remember

The results may skew if the company has a very large range of products.

This is very useful when comparing against the margins of previous years.

A 33% gross margin means products are marked up 50% and so on.

For Cory's Tequila Co.

($12,154-4,240)

$12,154

= 0.65

Gross Profit Margin Analysis:

The gross margin is not an exact estimate of the company's pricing strategy but it does give a good indication of financial health. Without an adequate gross margin, a company will be unable to pay its operating and other expenses and build for the future. Cory's Tequila Co. has a gross margin of 65% therefore their mark-up is over 100% of the cost. In general, a company's gross profit margin should be stable. It should not fluctuate much from one period to another, unless the industry it is in has been undergoing drastic changes which will affect the costs of goods sold or pricing policies.

Price to Earnings Ratio - P/E Ratio

Market Value per Share

=

Earnings per Share

One of the most widely used ratios, it compares the current price with earnings to see if a stock is over or under valued.

Things to remember

Generally a high P/E ratio means that investors are anticipating higher growth in the future.

The average market P/E ratio is 20-25 times earnings.

The p/e ratio can use estimated earnings to get the forward looking P/E ratio.

Companies that are losing money do not have a P/E ratio.

For Cory's Tequila Co. $107.125 = 164.8 $0.65
For Cory's Tequila Co.
$107.125
= 164.8
$0.65

Price-Earnings Analysis:

Sometimes referred to as the multiple, the idea behind the P/E ratio is that it is a prediction or more likely an expectation of the company's performance in the future. The P/E ratio for the overall market averages around 20, so as you can see Cory's Tequila Co. is much higher than this. In other words the market is expecting big things from Cory's Tequila Co. over the next little while.

One thing to remember is that if a company has a low P/E ratio it doesn't necessarily mean that it is undervalued. The P/E doesn't dictate the stock price, in fact a low P/E could mean that the company's earning are flat or growing slowing, they could also be in financial trouble. In fact the P/E ratio doesn't tell a whole lot, but it's useful to compare the P/E ratios of other companies in the same industry, or to the market in general, or against the company's own historical P/E ratios.

Profit Margin

Net Income

=

Revenue

Indicates what portion of sales contribute to the income of a company.

Things to remember

This ratio is not useful for companies losing money, since they have no profit.

A low profit margin can indicate pricing strategy and/or the impact competition has on margins.

For Cory's Tequila Co.

$2,096

$12,154

= 0.17

Profit Margin Analysis:

A profit margin of 17% means that for each dollar of sales that Cory's Tequila Co. generates it is contributing 17 cents to its bottom line (net income). This ties in with gross profit margin, Cory's Tequila Co. has a healthy pricing strategy which is evident in both ratios. In cutthroat pricing industries such as retail and gasoline you would expect the profit margin much lower because of the heavy competition. We can interpret that Cory's Tequila Co. either has exceptional products which customers are willing to pay a substantial premium for, or Cory's Tequila Co. really doesn't have much competition therefore they can charge what they wish.

Return On Assets - ROA

Net Income + Interest Expense

=

Total Assets

Indicates what return a company is generating on the firm's investments/assets.

Things to remember

The ROA is often referred to as ROI

We add the interest expense to ignore the costs associated with funding those assets.

For Cory's Tequila Co.

$2,096

$14,725

= 0.14

Return on Assets Analysis:

This is an important ratio for companies deciding whether or not to initiate a new project. The basis of this ratio is that if a company is going to start a project they expect to earn a return on it, ROA is the return they would receive. Simply put, if ROA is above the rate that the company borrows at then the project should be accepted, if not then it is rejected. Cory's Tequila Co.'s ROA is 14% - very high, this is over double the cost of borrowing (at time of writing).

Return On Equity - ROE

Net Income

=

Shareholder's Equity

Indicates what return a company is generating on the owners' investment.

Things to remember

If new shares are issued then use the weighted average of the number of shares throughout the year.

For high growth companies you should expect a higher ROE.

Averaging ROE over the past 5-10 years can give you a better idea of the historical growth.

For Cory's Tequila Co. $2,096 = 0.18 $11,678
For Cory's Tequila Co.
$2,096
= 0.18
$11,678

Return on Equity Analysis:

Sometimes ROE is referred to as Stockholder's return on investment, it tells the rate that shareholders are earning on their shares. Cory's Tequila Co. is earning a very respectable 18% on shareholder's equity. But ROE is often misunderstood, for example if the return on equity is 10% then ten cents of assets are created for each dollar that was originally invested. Companies that generate high returns relative to their shareholder's equity are companies that pay their shareholders off handsomely, creating substantial assets for each dollar invested. These businesses are more than likely self-funding companies that require no additional debt or equity investments.

Asset Turnover

Revenue

=

Total Assets

Indicates the relationship between assets and revenue.

Things to remember

Companies with low profit margins tend to have high asset turnover, those with high profit margins have low asset turnover - it indicates pricing strategy.

This ratio is more useful for growth companies to check if in fact they are growing revenue in proportion to sales.

For Cory's Tequila Co. $12,154 = 0.85 $14,725
For Cory's Tequila Co.
$12,154
= 0.85
$14,725

Asset Turnover Analysis:

This ratio is useful to determine the amount of sales that are generated from each dollar of assets. As noted above, companies with low profit margins tend to have high asset turnover, those with high profit margins have low asset turnover. Cory's Tequila Co.'s asset turnover seems to be relatively low, meaning that it makes a high profit margin on its products. For companies in the retail industry you would expect a very high turnover ratio - mainly because of cutthroat and competitive pricing.

Collection Ratio

Accounts Receivable

=

(Revenue/365)

This indicates the average number of days it takes a company to collect unpaid invoices.

Things to remember

A high ratio indicates that the company is having problems getting paid for services or products.

The ratio is sometimes seasonally affected, rising during busy seasons and falling during the off-season. To account for this seasonality, the average accounts receivable ((beginning + ending accounts receivable)/2) could be used instead.

For Cory's Tequila Co. $1,242 = 37.3 ($12,154/365)
For Cory's Tequila Co.
$1,242
= 37.3
($12,154/365)

Collection Ratio Analysis:

This ratio could perhaps be renamed as the "Thug Ratio", it explains the average time it takes to receive payment on sales. The "Thugs" at Cory's Tequila Co. seem to be doing their job quite well, on average it takes 37 days for customers to clear their invoices. This is quite reasonable since most companies clear pay all of their bills on a monthly basis. If we were really picky we could redo this calculation using only credit sales since cash purchases are received immediately.

Inventory Turnover

Cost of Goods Sold

=

Average or Current Period Inventory

An important and often overlooked ratio that indicates inventory levels.

Things to remember

A low turnover is usually a bad sign because products tend to deteriorate as they sit in a warehouse.

Companies selling perishable items have very high turnover.

For more accurate inventory turnover figures, the average inventory figure, ((beginning inventory + ending inventory)/2), is used when computing inventory turnover. Average inventory accounts for any seasonality effects on the ratio.

For Cory's Tequila Co. $4,240 = 6.50 $652
For Cory's Tequila Co.
$4,240
= 6.50
$652

Inventory Analysis Cory's Tequila Co. inventory has gone up almost 100% since last year, this could mean nothing or something. There could be something fundamentally wrong, perhaps sales are slowing. A change of 100% is quite substantial and should be a cause for concern if sales are slowing. But if we look more closely at Cory's Tequila Co.'s sales it shows that product sales have increased almost 50% since last year. In other words the higher inventory could simply be a factor of higher demand.

Debt-Asset Ratio

Total Liabilities

=

Total Assets

Indicates what proportion of the company's assets are being financed through debt.

Things to remember

This ratio is very similar to the debt-equity ratio.

A ratio under 1 means a majority of assets are financed through equity, above 1 means they are financed more by debt. Furthermore you can interpret a high ratio as a "highly debt leveraged firm".

For Cory's Tequila Co.

$3,003

$14,725

= 0.20

Debt/Asset Analysis:

Not a particularly exciting ratio, but a useful one. Cory's Tequila Co.'s debt/asset ratio is fairly low, meaning that its assets are financed more through equity rather than debt. And if you'll notice Cory's Tequila Co. has zero long term

debt and shouldn't have to worry about creditors getting nervous. Companies with high ratios are placing themselves at risk, especially in an increasing interest rate market. Creditors are bound to get worried if the company is exposed to a large amount of debt and may demand that the company pay some of it back.

Debt-Equity Ratio

Total Liabilities

=

Shareholders Equity

Indicates what proportion of equity and debt that the company is using to finance its assets. Sometimes investors only use long term debt instead of total liabilities for a more stringent test.

Things to remember

A ratio greater than one means assets are mainly financed with debt, less than one means equity provides a majority of the financing.

If the ratio is high (financed more with debt) then the company is in a risky position - especially if interest rates are on the rise.

For Cory's Tequila Co. $3,003 = 0.26 $11,678
For Cory's Tequila Co.
$3,003
= 0.26
$11,678

Share Capital Analysis The shareholder's capital has risen quite a bit if you compare the balance sheet numbers versus the previous year. Again this could mean a number of things, there are a couple reasons that this could have happened. Perhaps they've made acquisitions which were partially paid for through the issue of stock, or maybe they took on additional share capital from another firm. Another possible reason is that they had to issue more shares because they were strapped for cash. For the most part a rise in share capital is better than a rise in debt, but too much of a rise could be cause for alarm.

The Debt/Equity ratio is certainly far from perfect! A low ratio of 0.26 means that the company is exposing itself to a large amount of equity. This is certainly better than a high ratio of 2 or more since this would expose the company

to risk such as interest rate increases and creditor nervousness. One way to improve their situation would be to

issue more debt and use the cash to buyback some of its outstanding shares. The problem with issuing more and more stock like Cory's Tequila Co. has done means that outstanding shares become diluted and existing investors

receive a smaller ownership portion with each additional share issued.

Note: Some prefer to use only "interest bearing long term debt" instead of total liabilities to get a more precise calculation.

Acid Test (Quick Ratio)

(Cash + Accounts Receivable + Short-term Investments)

=

Current Liabilities

A stringent test that indicates if a firm has enough short-term assets (without selling inventory) to cover its

immediate liabilities. It is similar but a more strenuous version of the "working capital" ratio, indicating whether

liabilities could be paid without selling inventory.

Things to remember

An extreme version of the working capital ratio because it only uses cash and equivalents.

The ratio excludes inventory, which for some companies can make up a large

portion of its assets.

For Cory's Tequila Co.

$827+$1189+$1242

$3,003

= 1.08

Acid Test Analysis:

This ratio is used to determine risk that is not detected by the Working Capital ratio. Cory's Tequila Co. seems to be all right in this area. Their ratio of 1.08 means that they have just enough liquid assets to cover a unexpected drawdown of liabilities (people wanting their money now). Companies with ratios of less than 1 can not pay their current liabilities and should be looked at with extreme care. Furthermore if the acid ratio is much lower than the working capital ratio it means that current assets are highly dependent on inventory - retail stores are examples of this type of business.

Interest Coverage

=

EBITDA

Interest Expense

Indicates what portion of debt interest is covered by a company's cash flow situation.

Things to remember

A ratio under 1 means that the company is having problems generating enough cash flow to pay its interest expenses.

Ideally you want the ratio to be over 1.5.

Interest Coverage Analysis:

If you will notice, Cory's Tequila Co. doesn't have any long term debt - therefore you will not find an interest expense. What a great position to be in, practically debt free. Companies with a ratio below 1 could run into serious trouble servicing its loan payments and are considered to be a high risk of defaulting. Because Cory's Tequila Co.

has no interest expense its interest coverage ratio is infinite

obviously

the best you could possibly have.

Working Capital Ratio (Current Ratio)

Current Assets

=

Current Liabilities

Indicates if a firm has enough short-term assets to cover its immediate liabilities.

Things to remember

If the ratio is less than one then they have negative working capital.

A high working capital ratio isn't always a good thing, it could indicate that they have too much inventory or they are not investing their excess cash.

For Cory's Tequila Co. $4,615 = 1.54 $3,003
For Cory's Tequila Co.
$4,615
= 1.54
$3,003

This ratio indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess

assets. Most believe that a ratio between 1.2 and 2.0 is sufficient, Cory's Tequila Co. seems to be comfortably in this area.

If you wanted to take this ratio a step further then you could try the Acid Test/Quick Ratio - it is a more strenuous version of the W/C, indicating whether liabilities could be paid without selling inventory.

- it is a more strenuous version of the W/C, indicating whether liabilities could be paid