Quest By Finology

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10 Financial Ratios every investor should know! Part 4

1. Debt/Equity Ratio
2. Debt/Capitalization Ratio
3. Cash Conversion Cycle
4. Return on Capital Employed
5. P/B Ratio
6. EV/EBITDA
7. Asset Turnover
8. Price/FCF Ratio
9. Interest Coverage Ratio
10. Dividend Payout Ratio
1. Debt/Equity Ratio

Formula: Total liabilities / Total equity

The debt-to-equity ratio measures the amount of debt

a company has in relation to its equity.

A high ratio indicates that a company may have a

higher financial risk due to a greater reliance on debt
financing.

2. Debt/Capitalization Ratio

Formula: Total debt / (Total debt + Total equity)

Debt-to-capitalization ratio measures proportion of

company's capitalization funded by debt.

A high ratio indicates company has high debt relative

to its equity & may have higher financial risk.
3. Cash Conversion Cycle

Formula: Days inventory outstanding + Days sales

outstanding - Days payable outstanding

Cash conversion cycle measures amount of time it

takes for company to convert its inventory into cash.

A lower CCC indicates that a company is able to

quickly convert its inventory into cash, which may
indicate better efficiency in managing working capital.

4. Return on Capital Employed

Formula: Earnings before interest and taxes (EBIT) /

(Total assets - Current liabilities)

ROCE measures the amount of net income a

company generates as a percentage of its total capital
employed, which includes both debt and equity.

A high ratio indicates that a company is generating

strong returns on its investments.
5. P/B Ratio

Formula: Market price per share / Book value per

share

The price-to-book ratio compares a company's market

value to its book value.

A low ratio may indicate that a stock is undervalued.

6. EV/EBITDA Ratio

Formula: Enterprise value / Earnings before interest,

taxes, depreciation, and amortization (EBITDA)

The enterprise value-to-EBITDA ratio compares a

company's enterprise value to its EBITDA.

A low ratio may indicate that a company is

undervalued.
7. Asset Turnover Ratio

Formula: Revenue / Total assets

The asset turnover ratio measures a company's

efficiency in using its assets to generate revenue. A
high ratio indicates that a company is efficient at
generating revenue from its assets.

8. Price/FCF Ratio

Formula: Market price per share / Free cash flow per

share

The price-to-free cash flow ratio compares a

company's market value to its free cash flow.

A low ratio may indicate that a stock is undervalued.

9. Interest Coverage Ratio

Formula: Earnings before interest and taxes (EBIT) /

Interest expense

The interest coverage ratio measures a company's

ability to cover its interest expenses with its earnings.

A high ratio indicates that a company is able to meet

its interest obligations without difficulty.

10. Dividend Payout Ratio

Formula: Total dividends / Net income

The dividend payout ratio measures percentage of

earnings that a company pays out as dividends to its
shareholders.

A low ratio may indicate that a company is retaining

more earnings to reinvest in its business.
Want to learn more terminologies like this? Do visit our
PART 1, 2 & 3 threads of financial terminologies -

Apart from these 10 terms, finance includes more

concepts which you can learn through Quest's Value
Investing Course -

Here's how you can access the course

https://bit.ly/quest-value-investing-cou

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