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Quick Formulas Financial Analysis

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to understand and measure how well a company is doing in an

area. Ratios can be used to compare one company against

another, or one time period against another. Common size

statements are used to compare different companies, as each line

item is expressed as a ratio of another, and therefore can be used

for accurate comparison against different sized companies. Trend

analysis is helpful to understand the change in a companys

financial statements from one period to another.

Liquidity Ratios

The Current Ratio is used to test the company's ability to pay its

short term obligations. Below 1 means the company does not

have sufficient incoming cash flow to meet its obligations over the

coming year.

liquidity. The quick ratio measures a company's ability to meet its

short-term obligations with its most liquid assets. The higher the

quick ratio, the better the position of the company.

Profitability Ratios

Return on Assets is an indicator of how profitable a company is

relative to its total assets. ROA gives an idea as to how efficient

management is at using its assets to generate earnings.

as a percentage of shareholders equity. Return on equity

measures a corporation's profitability by revealing how much

profit a company generates with the money shareholders have

invested.

well a company is using its money to generate returns. Comparing

a company's return on capital (ROIC) with its cost of capital

(WACC) reveals whether invested capital was used effectively.

profitability by revealing how much profit a company generates

with the money shareholders have invested.

financial health by revealing the proportion of money left over

from revenues after accounting for the cost of goods sold.

of sales that company makes.

operations of the company, before financing expenses and taxes.

allocated to each outstanding share of common stock.

Activity Analysis

Asset Turnover measures a firm's efficiency at using its assets

to generate sales revenue, the higher the better.

effectiveness in extending credit as well as collecting debts. The

receivables turnover ratio is an activity ratio, measuring how

efficiently a firm uses its assets.

receivables are outstanding. High numbers indicate long

collection periods, low numbers indicate efficient collection of

receivables.

inventory will be sold and replaced in a year.

it takes for a company to turnover its entire inventory.

generate profit. The higher the number, the more efficient

managements use of fixed assets.

capital to the generation of sales over a given period. This

provides some useful information as to how effectively a company

is using its working capital to generate sales.

The Debt Ratio indicates what proportion of debt a company has

relative to its assets. The measure gives an idea to the leverage

of the company along with the potential risks the company faces

in terms of its debt-load.

leverage. It indicates what proportion of equity and debt the

company is using to finance its assets.

company's financial leverage to the tangible asset value of

owner's equity. It indicates what proportion of equity and debt the

company is using to finance its tangible assets.

to meet its debt obligations. Failing to meet these obligations

could force a company into bankruptcy.

meet all of its debt repayment obligations, both interest and

principal repayments.

Market Analysis

The Price to Earnings Ratio tells us how many years it will take

for earnings to repay the current market share price. This is a

useful measure to compare companies in the same industry.

dividends each year relative to its share price. In the absence of

any capital gains, the dividend yield is the return on investment

for a stock.

are paid out to shareholders. Earnings not paid to shareholders

are expected to be retained by the company and invested in

further operations.

Price to Book Ratio tells us the relative value the market places

on the company to the accounting valuation. This ratio provides a

basic understanding of residual value of a company should it go

bankrupt.

allocated to each outstanding share of common stock.

DuPont Analysis

Du Pont Analysis is used to identify the components of business

operations that lead to shareholders return. Total return on equity

is the profitability, multiplied by the rate of asset turnover,

multiplied by the ratio of assets to equity (leverage). By

identifying each component and evaluating, strength and

weakness can be evaluated, as well as insight into competitive

advantage. Understanding how each element leads to return on

equity will help a researcher investigate further into the

operations of a company.

of sales that company makes.

to generate sales revenue, the higher the better.

owner's equity of a company. The higher the number, the higher

the leverage.

Analysis of Leverage

Analysis of Leverage is used to evaluate how effectively

management is using borrowed funds to make a return for

the return to shareholders. This is done by financing the

companys assets with debt, which requires a fixed payment of

interest. If the assets financed by debt generate pretax net

income sufficient to repay this interest, then any additional net

income is profit that goes to the shareholders.

A companys assets can be divided into assets funded by equity,

and assets funded by debt. It is possible to analyze the efficiency

with which a companys assets generate pretax income, and

allocate this income in proportion to the capital structure. We can

then determine the amount that each set of assets contributes to

net income. We would expect that management would be able

to use assets financed by debt to generate enough net income to

pay the borrowing costs, and hopefully produce additional income

for the shareholders. If the income generated by the borrowed

assets is negative, then it may be advisable for a company to

alter its capital structure, or focus on improving the efficiency of

its assets in regards to generating net income.

dollar of assets generates before paying out taxes and interest.

This tells us how efficiently management uses its assets.

funded by shareholders equity, and assets funded by borrowed

debt.

the assets funded by shareholders equity and operations.

assets funded by borrowed debt.

pretax income that is provided by managements use of debt to

fund assets. Higher numbers show good use of debt. Negative

number show losses generated by the assets financed by debt.

Sustainable Growth Rate is the maximum growth rate of a

company if none of its ratios change and it does not raise new

capital through selling shares.

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