Asset Turnover

What Does Asset Turnover Mean?

The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales
in dollars by assets in dollars.

Formula:
Sale/ total assets

Also known as the Asset Turnover Ratio.

Investopedia explains Asset Turnover

Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue - the
higher the number the better. It also indicates pricing strategy: companies with low profit
margins tend to have high asset turnover, while those with high profit margins have low asset
turnover.

Read more: http://www.investopedia.com/terms/a/assetturnover.asp#ixzz1WLWoTqdm

Days Working Capital

What Does Days Working Capital Mean?

An accounting and finance term used to describe how many days it will take for a company to
convert its working capital into revenue. The faster a company does this, the better.

To calculate days working capital, the following formula can be used:

Average working capital x 365

Annual sales turnover

Days working capital can be used in ratio and fundamental analysis.

Investopedia explains Days Working Capital

When utilizing any ratio, it is important to consider how this company has evolved over time and
how it compares to similar companies in the same industry. By comparing this ratio in a
historical and relative basis, you will get a better understanding of how efficient a given
company actually is.

Debt-Adjusted Cash Flow - DACF

What Does Debt-Adjusted Cash Flow - DACF Mean?

A financial ratio commonly used in the analysis of oil companies, representing the after-tax
operating cash flow, excluding financial expenses after taxes.

Debt-adjusted cash flow (DACF) is calculated as follows:

DACF = cash flow from operations + financing costs (after tax) + exploration expenses (before
tax) +/- working capital adjustment

Investopedia explains Debt-Adjusted Cash Flow - DACF

DACF is often used in the financial ratio EV/DACF, where EV is the enterprise value of the
company being analyzed. This ratio is used in place of EV/EBITDA as a valuation ratio. This
ratio is good for use in the oil industry because it is an after-tax calculation (good for an industry
with high resource taxes) and independent of companies' financing decisions.

Acid-Test Ratio

What Does Acid-Test Ratio Mean?

A stringent indicator that determines whether a firm has enough short-term assets to cover its
immediate liabilities without selling inventory. The acid-test ratio is far more strenuous than the
working capital ratio, primarily because the working capital ratio allows for the inclusion of
inventory assets.

Calculated by:
Investopedia explains Acid-Test Ratio- quick ratio
Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at
with extreme caution. Furthermore, if the acid-test ratio is much lower than the working capital
ratio, it means current assets are highly dependent on inventory. Retail stores are examples of
this type of business.

The term comes from the way gold miners would test whether their findings were real gold
nuggets. Unlike other metals, gold does not corrode in acid; if the nugget didn't dissolve when
submerged in acid, it was said to have passed the acid test. If a company's financial statements
pass the figurative acid test, this indicates its financial integrity.

Inventory Turnover

What Does Inventory Turnover Mean?

A ratio showing how many times a company's inventory is sold and replaced over a period. the

The days in the period can then be divided by the inventory turnover formula to calculate the
days it takes to sell the inventory on hand or "inventory turnover days".

Investopedia explains Inventory Turnover

Although the first calculation is more frequently used, COGS (cost of goods sold) may be
substituted because sales are recorded at market value, while inventories are usually recorded at
cost. Also, average inventory may be used instead of the ending inventory level to minimize
seasonal factors.
This ratio should be compared against industry averages. A low turnover implies poor sales and,
therefore, excess inventory. A high ratio implies either strong sales or ineffective buying.

High inventory levels are unhealthy because they represent an investment with a rate of return of
zero. It also opens the company up to trouble should prices begin to fall

Profitability Ratios

These ratios tell us whether a business is making profits - and if so whether at an acceptable rate. The
key ratios are:

Ratio Calculation Comments

Gross [Gross Profit / Revenue] This ratio tells us something about the business's ability
Profit x 100 (expressed as a consistently to control its production costs or to manage the
Margin percentage margins its makes on products its buys and sells. Whilst sales
value and volumes may move up and down significantly, the gross
profit margin is usually quite stable (in percentage terms).
However, a small increase (or decrease) in profit margin, however
caused can produce a substantial change in overall profits.
Operating [Operating Profit / Assuming a constant gross profit margin, the operating profit
Profit Revenue] x 100 margin tells us something about a company's ability to control its
Margin (expressed as a other operating costs or overheads.
percentage)
Return on Net profit before tax, ROCE is sometimes referred to as the "primary ratio"; it tells us
capital interest and dividends what returns management has made on the resources made
employed ("EBIT") / total assets available to them before making any distribution of those returns.
("ROCE") (or total assets less
current liabilities

Efficiency ratios

These ratios give us an insight into how efficiently the business is employing those resources invested in
fixed assets and working capital.

Ratio Calculation Comments

Sales Sales / Capital A measure of total asset utilisation. Helps to answer the question -
/Capital employed what sales are being generated by each pound's worth of assets
Employed invested in the business. Note, when combined with the return on
sales (see above) it generates the primary ratio - ROCE.
Sales or Sales or profit / Fixed This ratio is about fixed asset capacity. A reducing sales or profit
Profit / Assets being generated from each pound invested in fixed assets may
Fixed indicate overcapacity or poorer-performing equipment.
Assets
Stock Cost of Sales / Stock turnover helps answer questions such as "have we got too
Turnover Average Stock Value much money tied up in inventory"?. An increasing stock turnover
figure or one which is much larger than the "average" for an
industry, may indicate poor stock management.
Credit (Trade debtors The "debtor days" ratio indicates whether debtors are being
Given / (average, if possible) / allowed excessive credit. A high figure (more than the industry
"Debtor (Sales)) x 365 average) may suggest general problems with debt collection or the
Days" financial position of major customers.

Credit taken ((Trade creditors + A similar calculation to that for debtors, giving an insight into
/ "Creditor accruals) / (cost of whether a business is taking full advantage of trade credit
Days" sales + other available to it.
purchases)) x 365

Liquidity Ratios

Liquidity ratios indicate how capable a business is of meeting its short-term obligations as they fall due:

Ratio Calculation Comments

Current Current Assets / A simple measure that estimates whether the business can pay
Ratio Current Liabilities debts due within one year from assets that it expects to turn into
cash within that year. A ratio of less than one is often a cause for
concern, particularly if it persists for any length of time.
Quick Ratio Cash and near cash Not all assets can be turned into cash quickly or easily. Some -
(or "Acid (short-term notably raw materials and other stocks - must first be turned into
Test" investments + trade final product, then sold and the cash collected from debtors. The
debtors) Quick Ratio therefore adjusts the Current Ratio to eliminate all
assets that are not already in cash (or "near-cash") form. Once
again, a ratio of less than one would start to send out danger
signals.

Stability Ratios

These ratios concentrate on the long-term health of a business - particularly the effect of the
capital/finance structure on the business:

Ratio Calculation Comments

Gearing Borrowing (all long- Gearing (otherwise known as "leverage") measures the proportion
term debts + normal of assets invested in a business that are financed by borrowing. In
overdraft) / Net Assets theory, the higher the level of borrowing (gearing) the higher are
(or Shareholders' the risks to a business, since the payment of interest and
Funds) repayment of debts are not "optional" in the same way as
dividends. However, gearing can be a financially sound part of a
business's capital structure particularly if the business has strong,
predictable cash flows.
Interest Operating profit before This measures the ability of the business to "service" its debt. Are
cover interest / Interest profits sufficient to be able to pay interest and other finance costs?

Investor Ratios

There are several ratios commonly used by investors to assess the performance of a business as an
investment:

Ratio Calculation Comments

Earnings Earnings (profits) A requirement of the London Stock Exchange - an important ratio.
per share attributable to ordinary EPS measures the overall profit generated for each share in
("EPS") shareholders / existence over a particular period.
Weighted average
ordinary shares in
issue during the year
Price- Market price of share / At any time, the P/E ratio is an indication of how highly the market
Earnings Earnings per Share "rates" or "values" a business. A P/E ratio is best viewed in the
Ratio ("P/E context of a sector or market average to get a feel for relative
Ratio") value and stock market pricing.
Dividend (Latest dividend per This is known as the "payout ratio". It provides a guide as to the
Yield ordinary share / current ability of a business to maintain a dividend payment. It also
market price of share) measures the proportion of earnings that are being retained by the
x 100 business rather than distributed as dividends