1. Asset Performance
Asset Turnover = Sales/ Total Assets
Inventory Turnover = COGs/Inventory
A/R Turnover = Sales/A/R
Comment
Inventory days = 365/sales/inventories
Collection days = 365/sales/Account Receivable
2. Profitability Performance
EBIT margin = EBIT/Sales
Gross Profit Margin = Gross Profit/Sales
Net Profit Margin = Net Profit/Sales
3. Company Performance
Return on Asset = EBIT/ Total Assets
Comment
ROA gives a measure of the operating efficiency of the total business. It. ROA provides the foundation necessary for a company to deliver a good return on equity. A company without a good ROA finds it almost impossible to generate a satisfactory ROE. ROA is calculated by using pre-tax.
Sale margin and Sale to TA are drivers of ROA. The drivers of sale margin are materials, labor, factory overhead, Admin and selling. The drivers of Sales to TA are fixed asset, inventories, and account receivable.
ROA = profit margin * Asset turn
ROA = EBIT/Sales * Sales/TA
4. Debt Performance
Debt Ratio = Total Liabilities/ Total Assets
Debt Ratio* = Total Liabilities-Bearing Debt/ Total Assets
Interest Coverage = EBIT/Interest Paid
Debt to Equity Radio = Total Debt/ Total Equity
Comment
D/E ratio measure the financial strength in long-term.
Interest Cover measures a company’s ability to service the borrowings. It expresses how much EBIT figure covers the interest paid.
5. Earning Performance
Earning per Share = Net Profit/# of Shares
Price Earning Ratio (P/E) = Share Price/EPS
Book Value (BV) = Equity/ # of Shares
P/BV = Share Price/BV
Return on Equity = Net Profit /Equity
Comment
EPS is one of the most widely quoted statistics when there is a discussion of a company’s performance or share value.
ROE is arguably the most important in business finance. It measures the absolute return delivered to the shareholders. A good figure brings success to the business—it results in a share price and makes it easy to attract new fund. These will enable the company to grow, given suitable market conditions and this in turn leads to greater profits and so on. All this leads to high value and continue growth in the wealth of its owners.
ROE measures operating performance. ROE assesses the return made to equity shareholder. ROE is calculated using an after-tax profit figure. ROE = EAT/Equity
ROE of 15 percent is a very satisfactory return.
6. Liquidity
Current ratio = CA/CL
Quick ratio = CA-INV/CL
Working capital to sales percentage
Comment
The current ratio is a favorite of the Bank that lends money. CA is cash and near-cash. Bank expects to see cash surplus. We look for a value in excess of 1.0.
The quick ratio remove inventory from the CA. The reason for excluding the inventory figure is that its liquidity can be a problem. Some types of inventories have difficulties of liquidity or difficult to covert into cash.
Source: Ciaran Wash, Key Management Ratio, Pearson Education Limited, 2003
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