Fundamental analysis

Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and management. When analyzing a stock, futures contract, or currency using fundamental analysis there are two basic approaches one can use; bottom up analysis and top down analysis. The term is used to distinguish such analysis from other types of investment analysis, such as quantitative analysis and technical analysis. Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts. There are several possible objectives:
• • • •

to conduct a company stock valuation and predict its probable price evolution, to make a projection on its business performance, to evaluate its management and make internal business decisions, to calculate its credit risk.

Fundamental analysis maintains that markets may mis-price a security in the short run but that the "correct" price will eventually be reached. Profits can be made by trading the mis-priced security and then waiting for the market to recognize its "mistake" and reprice the security. Fundamental analysis includes: 1. Economic analysis 2. Industry analysis 3. Company analysis On the basis of these three analyses the intrinsic value of the shares are determined. This is considered as the true value of the share. If the intrinsic value is higher than the market price it is recommended to buy the share. If it is equal to market price hold the share and if it is less than the market price sell the shares. A method of evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and company-specific factors (like financial condition and management). The end goal of performing fundamental analysis is to produce a value that an

investor can compare with the security's current price, with the aim of figuring out what sort of position to take with that security (underpriced = buy, overpriced = sell or short).

Economic Analysis
Economic analysis is a process whereby strengths and weaknesses of an economy are analyzed. Economic analysis is important in order to understand exact condition of an economy. It can cover a number of important economic issues that keep cropping up within a particular economy, which is being analyzed. Macroeconomic issues are important aspects of economic analysis process. However, economic analysis can also be done at a microeconomic level. Macroeconomic analysis helps in understanding fundamentals of an economy. Since such a form of analysis operates on a wide scale, it helps one to analyze strengths and weaknesses of particular economies.

Systematic approach to determining the optimum use of scarce resources, involving comparison of two or more alternatives in achieving a specific objective under the given assumptions and constraints. It takes into account the opportunity costs of resources employed and attempts to measure in monetary terms the private and social costs and benefits of a project to the community or economy. PESTLE Analysis This is used to perform an external environmental analysis by examining the many different external factors affecting an organization. The six attributes of PESTLE: Political (Current and potential influences from political pressures) Economic (The local, national and world economy impact) Sociological (The ways in which a society can affect an organisation) Technological (The effect of new and emerging technology) Legal (The effect of national and world legislation) Environmental (The local, national and world environmental issues)

Industry analysis

competition. key area where your competitor will perform well) CATWOE . management and its strategies. project economics. and structural changes. Industry research incorporates short term and long term demand-supply forecasts. key area where your competitors are performing poorly) Threats . The four attributes of MOST Mission (where the business intends to go) Objectives (the key goals which will help achieve the mission) Strategies (options for moving forward) Tactics (how strategies are put into action) SWOT This is used to help focus activities into areas of strength and where the greatest opportunities lie. business trends. price forecasts.What are the advantages? What is currently done well? (e. Major factors can include the power wielded by suppliers and buyers. The four attributes of SWOT: Strengths .g.g.What could be improved? What is done badly? (e. policy analysis. political and market factors that influence the way the industry develops. and the likelihood of new market entrants. cost structures. key area of best-performing activities of your company) Weaknesses . key area where you are performing poorly) Opportunities .Definition A market assessment tool designed to provide a business with an idea of the complexity of a particular industry. the condition of competitors. Company Analysis The analysis of the company with its growth potential.g.g. Industry analysis involves reviewing the economic.What good opportunities face the organisation? (e.What obstacles does the organisation face? (e. This is used to identify the dangers that take the form of weaknesses and both internal and external threats.

or alternatively to less formal judgmental methods. Both might refer to formal statistical methods employing time series. while the term "prediction" is used for more general estimates. The process of climate change and increasing energy prices has led to the usage of Egain Forecasting of buildings.Who is involved in the situation. embraces both statistical forecasting and a consensus process. it is generally considered good practice to indicate the degree of uncertainty attaching to forecasts.Who owns the process or situation being investigated and what role will they play in the solution? Environmental Constraints . cross-sectional or longitudinal data.What are the constraints and limitations that will impact the solution and its success? Forecasting Forecasting is the process of making statements about events whose actual outcomes (typically) have not yet been observed. Usage can differ between areas of application: for example in hydrology. but more general term. whereas planning predicts what the future should look like Statistical forecasting concentrates on using the past to predict the future by identifying trends. the terms "forecast" and "forecasting" are sometimes reserved for estimates of values at certain specific future times. albeit often ignored aspect of forecasting. such as the number of times floods will occur over a long period. Business perspectives help the business analyst to consider the impact of any proposed solution on the people involved. There are six elements of CATWOE Customers . Risk and uncertainty are central to forecasting and prediction.Who are the beneficiaries of the highest level business process and how does the issue affect them? Actors .What is the big picture and what are the wider impacts of the issue? Owner . The discipline of demand planning. also sometimes referred to as supply chain forecasting. The method uses Forecasting to reduce the energy needed to heat the building. Prediction is a similar. This forecast is referred to as a statistical forecast because it uses . Forecasting can be described as predicting what the future will look like. patterns and business drives within the data to develop a forecast. An important. is the relationship it holds with planning. thus reducing the emission of greenhouse gases. A commonplace example might be estimation of the expected value for some variable of interest at some specified future date. who will be involved in implementing solutions and what will impact their success? Transformation Process . Forecasting is used in the practice of Customer Demand Planning in every day business forecasting for manufacturing companies.What processes or systems are affected by the issue? World View .This is used to prompt thinking about what the business is trying to achieve.

for instance. or raise it from its owners. which we argue are really financial expenses. as we define it. we usually begin with a measure of earnings.1 summarizes this description of a firm in the form of a financial balance sheet: As we will see accounting statements allow us to acquire some information about each of these questions. includes both investments already made -.we will call these growth assets. at least as measured by accountants.and investments yet to be made -. we examine how to treat operating lease expenses. Free cash flows to the firm. what are the questions to which we would like to know the answers? A firm. the accounting earnings for many firms bear little or no resemblance to the true earnings of the firm. the values that emerge from them. which we consider to be capital expenses. are based upon after-tax operating earnings. in the form of equity. we begin by consider the philosophical difference between the accounting and financial views of firms. • • • • • • • • • Moving average weighted moving average Exponential smoothing Autoregressive moving average (ARMA) Autoregressive integrated moving average (ARIMA) Extrapolation Linear prediction Trend estimation Growth curve MEASURING EARNINGS To estimate cash flows.mathematical formulas to identify the patterns and trends while testing the results for mathematical reasonableness and confidence. commence with net income. a firm can either borrow the funds it needs to make these investments. Accounting versus Financial Balance Sheets When analyzing a firm. In particular. Figure 9. and research and development expenses. have to be adjusted to get a measure of earnings that is more appropriate for valuation. but they fall short in terms of both the . While we obtain and use measures of operating and net income from accounting statements. The adjustments affect not only our measures of earnings but our estimates of book value of capital. We then consider how the earnings of a firm. on the other hand. Different techniques of forecasting.we will call these assets-in-place -. In addition. Free cashflow to equity estimates. We also look at extraordinary items (both income and expenses) and one-time charges. in which case it is using debt. the use of which has expanded significantly in recent years as firms have shifted towards managing earnings more aggressively. The techniques used to smooth earnings over periods and beat analyst estimates can skew reported earnings and. if we are not careful. In this chapter.

thus denying us the option of using quarterly updates. given how much these firms change over time. The second is that reported earnings at these firms may bear little resemblance to true earnings because of limitations in accounting rules and the firms’ own actions. it is dangerous to base value estimates on information that is this old. the fuel used by an airline in the course of its flights is an operating expense. You have to either use the numbers in the last annual report (which does lead to inconsistent inputs) or estimate their values at the end of the last quarter (which leads to estimation error). the options have doubled as well. a more recent estimate of key items in the financial statements can be obtained by aggregating the numbers over the most recent four quarters. Consequently. while they do reveal them in annual reports. use more recent information. The estimates of revenues and earnings that emerge from this exercise are called “trailing 12-month” revenues and earnings and can be very different from the values for the same variables in the last annual report. it is critical that you stay with the most updated numbers you can find. analysts may have to draw on unofficial sources to update their valuations.timeliness with which they provide it and the way in which they measure asset value. Since you need to value these options. not all items in the annual report are revealed in the quarterly reports. When valuing firms in these markets. Instead. the last annual report that is available for a firm being valued can contain information that is sometimes six or nine months old.There are several financial markets where firms still file financial reports only once a year. There is a price paid for the updating. The Importance of Updating Earnings Firms reveal their earnings in their financial statements and annual reports to stockholders. Unfortunately. . but you are often required to value firms all through the year. earnings and risk. Even those that are not are changing substantially from quarter to quarter. (For instance. These firms are often growing exponentially and using numbers from the last financial year will lead to under valuing them. Adjusting Earnings The income statement for a firm provides measures of both the operating and equity income of the firm in the form of the earnings before interest and taxes (EBIT) and net income. firms do not reveal details about options outstanding (issued to managers and employees) in quarterly reports. if revenues have doubled. even if these numbers are estimates. as is the labor cost for an automobile company associated with producing vehicles. you can use the options outstanding as of the last annual report or assume that the options outstanding today have changed to reflect changes in the other variables. In the case of firms that are changing rapidly over time. there are two important considerations in using this measure. For instance. updated information might give you a chance to capture these changes. When valuing firms. Annual reports are released only at the end of a firm’s financial year. For example. Since firms in the United States are required to file quarterly reports with the SEC (10-Qs) and reveal these reports to the public. One is to obtain as updated an estimate as possible. Correcting Earnings Misclassification The expenses incurred by a firm can be categorized into three groups: • Operating expenses are expenses that generate benefits for the firm only in the current period.) For younger firms.

In . you make an assumption about how long it takes for research and development to be converted. but one of the most profound is that the value of the assets created by research does not show up on the balance sheet as part of the total assets of the firm. The second adjustment is for financial expenses such as operating leases expenses that are treated as operating expenses. the reality is that there are a number of capital expenses that are treated as operating expenses. This affects the measurement of operating income but not net income. We will consider how to capitalize R&D expenses in the first part of the section and extend the argument to other capital expenses in the second part of the section. For example. Capitalizing R&D Expenses Research expenses. This. This has several consequences. Neither financial nor capital expenses should be included in the operating expenses in the year that they occur. a significant shortcoming of accounting statements is the way in which they treat research and development expenses. since the approval process for new drugs is long. To illustrate. notwithstanding the uncertainty about future benefits. in turn. The third factor to consider is the effects of the phenomenon of “managed earnings” at these firms. in theory. since it will generate several years of revenues. Under the rationale that the products of research are too uncertain and difficult to quantify. research and development expenses at a pharmaceutical company should have fairly long amortizable lives. The net income of a firm should be its revenues less both its operating and financial expenses. For instance. measured correctly. accounting standards have generally required that all 5 R&D expenses to be expensed in the period in which they occur. The accounting measures of earnings can be misleading because operating.• Capital expenses are expenses that generate benefits over multiple periods. The first is the inclusion of capital expenses such as R&D in the operating expenses. capital and financial expenses are sometimes misclassified. should be capitalized. income is not computed after capital expenses. Thus. though capital expenses may be depreciated or amortized over the period that the firm obtains benefits from the expenses. This life will vary across firms and reflect the commercial life of the products that emerge from the research. should be equal to its revenues less its operating expenses. Technology firms sometimes use accounting techniques to post earnings that beat analyst estimates resulting in misleading measures of earnings. This is called the amortizable life of these assets. creates ripple effects for the measurement of capital and profitability ratios for the firm. on average. To capitalize and value research assets. the expense associated with building and outfitting a new factory for an automobile manufacturer is a capital expense. The operating income for a firm. Capital Expenses treated as Operating Expenses While. We will consider the two most common misclassifications in this section and how to correct for them. which skews the estimation of both operating and net income. • Financial expenses are expenses associated with non-equity capital raised by a firm. the interest paid on a bank loan would be a financial expense. into commercial products. No capital expenses should be deducted to arrive at net income.

an analyst . you cumulate 1/5 of the R&D expenses from four years ago. How long will it take. the R&D expenses in each of the five years prior to the current one have to be obtained. reflecting their re-categorization as capital expenses. Next. Once the amortizable life of research and development expenses has been estimated.contrast. We make the adjustment by adding back R&D expenses to the operating income (to reflect its reclassification as a capital expense) and subtract out the amortization of the research asset. 3/5 of the R&D expenses from two years ago. the next step is to collect data on R&D expenses over past years ranging back to the amortizable life of the research asset. for research to pay off at Amgen? Given the length of the approval process for new drugs by the Food and Drugs Administration. The final step in the process is the adjustment of the operating income to reflect the capitalization of research and development expenses. First. cash flow statement and income statement. 2/5 of the R & D expenses from three years ago. Thus. The second step in the analysis is collecting research and development expenses from prior years. This augments the value of the assets of the firm. on an expected basis. the R&D expenses that were subtracted out to arrive at the operating income are added back to the operating income. in the case of the research asset with a five-year life. research and development expenses at a software firm. it has a substantial amount of R&D expenses and we will attempt to capitalize it in this section. The first step in this conversion is determining an amortizable life for R & D expenses. if the research asset has an amortizable life of 5 years. the fact that R&D is entirely tax deductible eliminates the need for this adjustment. we will assume that this amortizable life is 10 years. Stock Investment decisions By looking at the balance sheet. the book value of equity. with the number of years of historical data being a function of the amortizable life. In financial terms. Adjusted Operating Income = Operating Income + R & D expenses – Amortization of Research Asset The adjusted operating income will generally increase for firms that have R&D expenses that are growing over time.1 Amgen is a bio-technology firm. estimated in the last step. where products tend to emerge from research much more quickly should be amortized over a shorter period. and by extension. the amortization of the research asset is treated the same way that depreciation is and netted out to arrive at the adjusted operating income. a fundamental analyst tries to determine a company’s value. 4/5 of the R&D expenses from last year and this year’s entire R&D expense to arrive at the value of the research asset. The net income will also be affected by this adjustment: Adjusted Net Income = Net Income + R & D expenses – Amortization of Research Asset While we would normally consider only the after-tax portion of this amount. Like most pharmaceutical firms. 6 Adjusted Book Value of Equity = Book Value of Equity + Value of the Research Asset Finally. the operating income is adjusted to reflect the capitalization of R&D expenses. Thus.

investment decisions are fairly easy to make .Price to earning growth ratio Current EPS and Forward EPS Price to sales ratio . This is what happened in January 2008. Before investing one should check the current valuation of the share price and invest only when the share price is at right price and not at over priced share. The bottom line is investors want to know how much money the company is making and how much it is going to make in the future. How will be its returns or its profits etc? Basically most of the investors invest in shares taking into consideration Company’s future growth prospects. To find the earning status ratios used are EPS . Earnings This is very important parameter. Broadly look into its last 5 or 10 years earnings whether the company has posted profits or losses. While technical analysis can be used on a timeframe of weeks. About Company What the company is doing and what are its businesses? How is the current demand for their products and how the demand will be in future like in next 3 to 5 years and so? (It is difficult to analyze the future demand yourself so you can visit financial websites or contact us) 2. it’s a good investment.Price to earning ratio Book value PB ratio . Time Horizon Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. 1.Price to book value ratio 4. In this approach. Although this is an oversimplification (fundamental analysis goes beyond just the financial statements). Most of the people invested at very high valuations and later on the share prices started to correct (falling down). Stock investment decisions are taken based in the following factors. Future earnings growth It is very important to analyze how the company is going to do in future. fundamental analysis often looks at data over a number of years.if the price of a stock trades below its intrinsic value. Generally most of the investors invest at higher valuations of shares and when share prices start coming down then they keep worrying. so this should not happen. To find the current valuation of the stock the ratios used are PE ratio .Earning per share 3. To find the future growth of the stock the ratios used are PEG ratio . this simple tenet holds true. Current valuation This is another very important factor which most of the investor forgets while doing their investments. days or even minutes. It’s all about earnings.attempts to measure a company’s intrinsic value.

You should look for high EPS stocks and the higher the better is the stock. . expansion plans take over plans. To find the debit status of the company the ratios used are Debit ratio Earnings Earning Per Share . EPS is calculated by taking the net earnings of the company and dividing it by the outstanding shares. EPS = Net Earnings / Outstanding Shares (Nowadays you will get this ready made.PE ratio PE ratio is again one of the most important ratio on which most of the traders and investors keep watch. Second example If Company B had earnings of RS 1000 crores and 500 shares outstanding.5.You should compare the EPS from one company to another. which are in the same industry/sector and not from one company from Auto sector and another company from IT sector. Debit status For any company to perform well in the future it is very important to be debt free or less debit because if company is having large debits like borrowings. loans then it becomes difficult for it to plan for any acquisitions. then its EPS becomes 10 (RS 1000 / 100 = 10). then its EPS becomes 2 (RS 1000 / 500 = 50).EPS EPS plays major role in investment decision. dividend payout and very important its most of the net profit goes in paying the interest and loans and other debits. So what is that you have to look in EPS of the company? Answer . Note . Current Valuations of the shares Price to Earnings Ratio . no need for you to do calculation. So in other words if the company is having fewer debits or no debit then they are having lots of cash in hand and they are free to take any decision in coming future.) For example If Company A had earnings of RS 1000 crores and 100 shares outstanding.

This generally happen in bull market and share price keeps on increasing. But. That is PE = Stock Price / EPS For example A company with a share price of RS 40 and an EPS of 8 would have a PE ratio of 5 (RS 40 / 8 = 5). The PE ratio is calculated by taking the share price and dividing it by the companies EPS.The PE ratio tells you whether the stock’s price is high or low compared to its forward earnings. the P/E ratio doesn't tell us the whole story of the company. Generally the P/E ratios are compared of one company to other companies in the same sector/industry and not in other industry before selecting any particular share. In bear market the low PE stocks having high growth prospects are selected as best investment options. Important . Generally the P/E ratios are compared of one company to other companies in the same sector/industry and not in other industry before selecting any particular share. Basically in bull market share prices keep increasing without giving more importance to its current valuation and once market realizes that it is over priced then they start selling. The high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. But. In bear market the low PE stocks having high growth prospects are selected as best investment options. The PE ratio is calculated by taking the share price and dividing it by the companies EPS. This generally happen in bull market and share price keeps on increasing.Important . The high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. Basically in bull market share prices keep increasing without giving more importance to its current valuation and once market realizes that it is over priced then they start selling. That is PE = Stock Price / EPS Current Valuations of the shares Price to Earnings Ratio .PE ratio PE ratio is again one of the most important ratio on which most of the traders and investors keep watch. Importance .The PE ratio tells you whether the stock’s price is high or low compared to its forward earnings.The PE ratio gives you an idea of what the market is willing to pay for the . the P/E ratio doesn't tell us the whole story of the company.

the better the value of the stock for future growth.PB ratio Basically PB ratio is mostly utilized by smart investors to find real wealth in shares. Generally.2 or 1. so investing in stocks having low PB ratio is to identify potential shares for future growth. It also depends on its future growth prospects. Some of the investors become quite wealthy by holding stocks for the long term of such companies whose growth is based on their businesses instead of market and one day when every one notices this stock the value investor’s pockets are full of profit. financial ratios. PB ratio is calculated as PB ratio = Share Price / Book Value per Share. A lower P/B ratio could mean that the stock is undervalued. On the other side. At all if you would like to do PE ratio comparison then it has to be done in same sectors/industry stocks and not like one stock from banking sector and other stock from pharmacy sector. So now you would have come to know how to choose stocks based on PE ratio. the book value can indicate whether a stock is under priced or overpriced. But this doesn’t mean that the ratio coming to 1.PEG ratio Because the market is usually more concerned about the future than the present.5 is not value investing. the lower the PB. So in other words if the share price is trading below its book value then it is considered as under priced and good for value investing. The use of PEG ratio will help you look at future earnings growth of the company. PEG is a widely used indicator of a stock's potential value. Like the PE. By being compared to the company's market value. and other future announcements. Many investors try finding low P/E ratios stocks of high value growth companies and make investments in such stocks which may prove real diamonds in future. Which P/E ratio to choose? If you believe that the companies has good long term prospects and good growth then one should not hesitate to invest in high P/E ratio stocks and if you are looking for value stocks which prove real diamonds in future then you can go with low PE stocks provided that companies has good growth and expansions plans. .companies earning. it is always looking for companies projected plans. What is book value? Book value is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated (closed). a low P/E of high growth stocks may indicate that the market has ignored these stocks which are also known as value stocks. The higher the P/E the more the market is willing to pay for the companies earning. Future earnings growth Projected Earning Growth ratio . Some investors say that a high P/E ratio means the stock is over priced on the other side it also indicates the market has high hopes for such company’s future growth and due to which market is ready to pay high price. Price to Book Ratio . if the ratio comes below 1 then it is considered as value investing.

It relies on projections. is it that companies having no current earnings are bad investments? Answer is Not necessarily. A few important things to remember about PEG: It is about year-to-year earnings growth. a low P/E stock with low or no projected earnings growth is not going to give you good returns in future because its PE is low means investors are not ready to pay high and its PEG is also low because companies do not have any good future growth or expansion plans so investment in such stocks could prove less or no returns. It’s forward earning estimation which market analyst or company calculates.To find under valued stocks you can look for low P/S ratios. To calculate the PEG the P/E is divided by the projected growth in earnings. That is PEG = P/E / (projected growth in earnings) For example A stock with a P/E of 30 and projected earning growth for next year is 15% then that stock would have a PEG of 2 (30 / 15 = 2). a lower PEG means that the stock is more undervalued. You can calculate the P/S by dividing the market cap of the company by the total revenues of the company. So the conclusion is you can invest in high P/E stocks but the projected earning growth should be high so that companies can provide good returns. In above example what does the “2” mean? Lower the PEG ratio the less you pay for each unit in future earning growth. . which may not always be accurate.Similar to the P/E ratio. because such companies may be new and trying to grow and expand but you should approach such companies with precaution. You can also calculate the P/S by dividing the current stock price by the sales per share. Looking at the opposite situation. That is P/S = Market Cap / Revenues or P/S = Stock Price / Sales Price per Share Conclusion . The Price to Sales (P/S) ratio looks at the current stock price relative to the total sales per share. Price to Sales Ratio The question is.

All tools should be used to find growth and value stocks. Generally it is considered that debit ratio less then 1is good investment option. Debit status of the Company Debit Ratio This is one the very important ratio as this tells you how much company relies on debit to finance its assets.The lower the P/S ratio the better is the value of the company. You calculate the Dividend Yield by taking the annual dividend per share and divide by the stock’s price. The higher the ratio the more risk for company to manage going forward. the Dividend Yield is 6%. After making use of above all tools you will get excellent stocks which will give you excellent . So look for company’s having low debit ratio. loans etc. This measurement tells you what percentage return a companies pays out to shareholders in the form of dividends. But even some investor considers higher debit ratio provided the company is having good growth prospects. (RS 1.50 and the stock trades at RS 25. well-established companies tend to payout a higher percentage then do younger companies and their dividend history can be more consistent.06). Older. Dividend Yield If you are a value investor or looking for dividend income then you should look for Dividend Yield figure of the stock. That is Dividend Yield = annual dividend per share / stock's price per share For example If a company’s annual dividend is RS 1. If company has fewer debits then company can make more profit instead paying for its debits like interests rates.Any single tool or ratio should not be used to make your investment or trading decision nor will they provide you any buy or sell recommendation. Important Note .50 / RS 25 = 0.

but it is also sometimes used as a synonym for EBIT and operating profit. (Earnings before interest and taxes / Sales) Profit margin. Ratio analysis is predominately used by proponents of fundamental analysis. other companies. This is true if the firm has no non-operating income. financing and liquidity. net margin or net profit margin Return on equity (ROE) . Some common ratios include the price-earnings ratio. Ratios are calculated from current year numbers and are then compared to previous years. Gross profit margin or Gross Profit Rate OR Operating margin. Operating Income Margin. or even the economy to judge the performance of the company. earnings per share. You will find all these ratios in any financial website or you can contact us. Profitability ratios Profitability ratios measure the company's use of its assets and control of its expenses to generate an acceptable rate of return Gross margin. debt-equity ratio.returns in mid term to long term. Operating profit margin or Return on sales (ROS) Note: Operating income is the difference between operating revenues and operating expenses. Ratio Analysis A tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. the industry. asset turnover and working capital. activity. There are many ratios that can be calculated from the financial statements pertaining to a company's performance.

Return on investment (ROI ratio or Du Pont Ratio) Return on assets (ROA) Return on assets Du Pont (ROA Du Pont) Return on Equity Du Pont (ROE Du Pont) Return on net assets (RONA) Return on capital (ROC) Risk adjusted return on capital (RAROC) OR Return on capital employed (ROCE) Note: this is somewhat similar to (ROI). which calculates Net Income per Owner's Equity Cash flow return on investment (CFROI) Efficiency ratio Net gearing Basic Earnings Power Ratio .

Liquidity ratios Liquidity ratios measure the availability of cash to pay debt. Average collection period Degree of Operating Leverage (DOL) DSO Ratio[ Average payment period Asset turnover Stock turnover ratio . Current ratio (Working Capital Ratio) Acid-test ratio (Quick ratio) Cash ratio Operation cash flow ratio Activity ratios (Efficiency Ratios) Activity ratios measure the effectiveness of the firms use of resources.

Payables Conversion Period Debt ratios (leveraging ratios) Debt ratios measure the firm's ability to repay long-term debt.Receivables Turnover Ratio Inventory conversion ratio Inventory conversion period (essentially same thing as above) Receivables conversion period (questionable) Payables conversion period (questionable) Cash Conversion Cycle Inventory Conversion Period + Receivables Conversion Period . Debt ratios measure financial leverage. Debt ratio Debt to equity ratio Long-term Debt to equity (LT Debt to Equity) Times interest-earned ratio / Interest Coverage Ratio OR Debt service coverage ratio .

Market ratios Market ratios measure investor response to owning a company's stock and also the cost of issuing stock. Earnings per share (EPS) Payout ratio OR Dividend cover (the inverse of Payout Ratio) P/E ratio Dividend yield Cash flow ratio or Price/cash flow ratio Price to book value ratio (P/B or PBV) Price/sales ratio PEG ratio Other Market Ratios EV/EBITDA .

EV/Sales .

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