Quick quide to some handy fundamental ratios Print

A quick guide to some handy fundamental ratios


Overview

Technicals or fundamentals? While there is much discussion about which method to use, we highly recommend that you use both. Each method of study has implications for the trading decisions you make.

Whether you find your company through stock screening, tips, stock pick list, newsletter, etc., all traders should go through the following steps to increase their confidence in the decisions they make.

  1. Evaluate the company - Fundamentals are used to evaluate whether or not a company is one that you would like to invest in.
  2. Good time to buy or not? - A company may look like a sound investment. But is it a good time to invest in it? This is when technical analysis can help you to determine your best buy/sell signals and decision-making criteria.

This month's newsletter will highlight some useful fundamental ratios in a quick and handy table.

SAVE THIS NEWSLETTER - It's a great reference!

Efficiency Ratios

Ratio Name
Quick Description
Formula
Accounts receivable turnover Measures ability to convert accounts receivables (or credit sales) into cash Accounts receivable turnover = (net credit sales / average net accounts receivable)
Age of accounts receivable Measures ability to convert accounts receivables (or credit sales) into cash Age of accounts receivable = 365 days / accounts receivable turnover
Asset efficiency Measures ability to generate revenue from assets N= per dollar of assets Asset Efficiency = (Revenues / Total Assets) x N
Asset turnover Measures ability to generate revenue from assets - expansion to include all assets Asset turnover = Net sales revenue / average total assets
Earnings retention ratio Calculates what the percentage of earnings are returned to shareholders Earnings retention ratio = ((earnings per share - dividend per share) / earnings per share)* 100%
Inventory turnover A ratio between the cost of goods sold and the average inventory balance Inventory turnover = cost of goods sold / average inventory
Net Cash Flow to Current Liabilities Measurement of a company's ability to cover current liabilities Net cash flow to current liabilities = net cash flow from operations / current liabilities
Revenue efficiency Measurement of how much revenue does a company need to take in to produce how much net earnings N= per dollars of revenue Revenue Efficiency = (Net earnings / Revenue) x N
Working capital turnover measurement of managements ability to use working capital to generate revenue Working capital turnover = Net sales revenue / average working capital

Liquidity Ratios

Ratio Name
Quick Description
Formula
Quick Report
Acid test ratio (quick ratio) The acid test ratio (or quick ratio) is a measurement of a company's ability to pay short term liabilities without selling inventory. Acid test ratio = (Accounts receivable + Cash equivalents + Cash) / Current liabilities [href="/?p=Fundamental-Analysis.Liquidity-Ratios&t=Acid+test+ratio+(or+quick+ratio)"]Read More[/HREF]
Cash Asset Ratio or Cash Ratio Measures the corporations ability to quickly liquidate assets and cover short-term liabilities. Cash ratio = (Cash equivalents + Cash) / Current liabilities [href="/?p=Fundamental-Analysis.Liquidity-Ratios&t=Cash+Asset+Ratio+or+Cash+Ratio"]Read More[/HREF]
Current ratio Measurement of a company's ability to pay short term liabilities. Current ratio = (inventory + accounts receivable + cash equivalents) / Current liabilities [href="/?p=Fundamental-Analysis.Liquidity-Ratios&t=Current+ratio"]Read More[/HREF]
Defensive-Interval ratio Measurement of how long a company can operate using only current liquid assets. Defensive-interval ratio = Current liquid assets (quick assets) / Projected daily operational expenditures [href="/?p=Fundamental-Analysis.Liquidity-Ratios&t=Defensive+Interval+ratio"]Read More[/HREF]

Overvalued/Undervalued Ratios (Equity position and coverage)

Ratio Name
Quick Description
Formula
Quick Report
Book value per share The idea behind book value per share is that if a company's calculated book value per share is higher than the current stock price, the company is undervalued (or vice versa)

To calculated book value per preferred share: (Share capital of preferred and common stock + contributed surplus + retained earnings) / number of preferred shares outstanding.

To calculate book value per common share: (share capital of common stock + contributed surplus + retained earnings) / number of common shares outstanding

[href="/?p=Fundamental-Analysis.Overvalued-and-Undervalued-Ratios&t=Book+value+per+share"]Read More[/HREF]
Debt to equity ratio The two most basic sources of funds for a company are debt and equity. Debt and equity both have unique characteristics and the relationship between these two sources is widely used to evaluate the financial strength of a business. Debt to equity = Total liabilities / Owner's equity [href="/?p=Fundamental-Analysis.Overvalued-and-Undervalued-Ratios&t=Debt+to+equity+ratio"]Read More[/HREF]
EPS rank EPS rank (earnings per share rank) is a measurement of a company's EPS growth (and stability of that growth) over the last five years. To calculate the EPS rank of a company, take the percent change in the last two quarters earnings, versus the same quarters of the previous year, combine and average with the 5 year data. [href="/?p=Fundamental-Analysis.Overvalued-and-Undervalued-Ratios&t=EPS+rank"]Read More[/HREF]
Price to book ratio (P/B) This is a ratio between current market price and the companies book value. P/B = Last close / Book value per share. [href="/?p=Fundamental-Analysis.Overvalued-and-Undervalued-Ratios&t=Price+to+book+ratio+(P/B)"]Read More[/HREF]
Price to cash flow (P/CF) This valuation focuses on the amount of cash a company can pay to its shareholders in the form of a dividend. To calculate price-to-cash-flow ratio, take the stock price and divide by the last reported yearly cash flow. [href="/?p=Fundamental-Analysis.Overvalued-and-Undervalued-Ratios&t=Price+to+cash+flow+(P/CF)"]Read More[/HREF]
Price to dividend (P/D) Price to dividend ratio is typically used as a general guide to determine whether an issue is overvalued or undervalued. A price to dividend ratio is the reciprocal of dividend yield. Dividend ratio = current market price per share / dividend [href="/?p=Fundamental-Analysis.Overvalued-and-Undervalued-Ratios&t=Price+to+dividend+(P/D)"]Read More[/HREF]
Price to earnings (P/E) P/E is a ratio of the stocks price and the stocks earnings per share. To calculate a P/E, take the price of the stock and divide it by it's earning per share. [href="/?p=Fundamental-Analysis.Overvalued-and-Undervalued-Ratios&t=Price+to+earnings+(P/E)"]Read More[/HREF]
Price to sales ratio (P/S) Price to sales ratio is a less-used type of fundamental valuation indicator. This valuation focuses on total revenue. To calculate this ratio, take the stock price and divide by the last 12 months revenue/share (12 month revenue per share is calculated by the last 12 month revenue combined divided by total number of shares outstanding). [href="/?p=Fundamental-Analysis.Overvalued-and-Undervalued-Ratios&t=Price+to+sales+ratio+(P/S)"]Read More[/HREF]
Times interest earned Times interest earned is a ratio which measures the amount of times interest payments can be covered by income before taxes. Times interest earned = (Income before taxes + interest) / Interest charges [href="/?p=Fundamental-Analysis.Overvalued-and-Undervalued-Ratios&t=Times+interest+earned"]Read More[/HREF]

Profitability Ratios

Ratio Name
Quick Description
Formula
Quick Report
Earnings per share (EPS) Earning per share or EPS is considered one of the primary driving forces behind share market price. To fully understand EPS read report. Earnings per share (EPS) = (Net income after taxes - preferred dividends) / Weighted average of outstanding common stocks [href="/?p=Fundamental-Analysis.Profitability-Ratios&t=Earnings+per+share"]Read More[/HREF]
Profit margin on sales Representation of the percentage of net sales after all expenses are recognized. Profit margin on sales = Income / Net sales [href="/?p=Fundamental-Analysis.Profitability-Ratios&t=Profit+margin+on+sales"]Read More[/HREF]