Financial business ratios
Elements of Financial business ratios:
| Financial Level | Ratio | Abbreviation | Where to look/how to calculate | Used to | Issue |
| Profitability | Return On Investment | ROI | (Net income / Investment) | ||
| Working Capital/Liquidity | Debtors Days | (Trade Debtors + Customer advances / Average daily sales) | Measure of the “time” being funded or sourced i.e. days taken to receive payment form customers, before paying creditors etc. | ||
| Working Capital/Liquidity | Stock Days | (Stocks/(Average daily cost of sales (PL: sales cost/365)) | Measure of the “time” being funded or sourced i.e. days taken to receive payment form customers, before paying creditors etc. | ||
| Working Capital/Liquidity | Creditor Days | (Trade Creditors/Average daily cost of sales) | Measure of the “time” being funded or sourced i.e. days taken to receive payment form customers, before paying creditors etc. | ||
| Working Capital/Liquidity | Liquid Ratio | (Liquid assets/(Creditors (amount falling due within one year))) | |||
| Working Capital/Liquidity | Quick ratio | ||||
| Working Capital/Liquidity | Current Ratio | (Current Assets/(Creditors (amount falling due within one year)) | Measure of the overall management of working capital. A measure of the organisations ability to meet its financial obligations falling due within one year | ||
| Profitability | Sales Generation | (sales/(total assets – current liabilities)) | Measure of how well the asset base is being used for sales generation i.e. the amount of sales per AED of asset | Increase if ROS falls | |
| Profitability | Sales Generation | (sales/total assets) | Measure of how well the asset base is being used for sales generation i.e. the amount of sales per AED of asset | Increase if ROS falls | |
| Profitability | Return on Sales | ROS | (PBIT/sales x 100) | Measure of how well the asset base is being used for sales generation i.e. the amount of sales per AED of asset | |
| Profitability | Return on Capital Employed (or – rate of return) | RONA | (PBIT/(total assets – current liabilities) x 100) | Measure of the operating efficiency of the organisation in terms of EBIT generated per AED of asset | |
| Profitability | Return on Capital Employed (or – rate of return) | ROTA | (PBIT/total assets x 100) | Measure of the operating efficiency of the organisation in terms of EBIT generated per AED of asset | |
| Investors Criteria | Price/Earnings | P/E ratio | (Share price/Earnings per share) | Measures the number of years it would take to recoup an investment form its share of the attributable equity profit – give a market view of the quality of the underlying earnings. Indicates how many times earnings investors are willing to pay for shares. | High – indicates that market expects earnings to rise. |
| Financial Structure | Earnings Per Share | EPS | (P&L account) | ||
| Financial Structure | Return on Equity | ROE | (Profit available for distribution to shareholders/Shareholders funds x 100) | ||
| Financial Structure | Interest Cover | Interest Cover | (PBIT/Interest payable) | Measure of an organisations ability to service its borrowings | |
| Financial Structure | Gearing (Leverage in US) | Gearing | (Debt/Shareholders fund x 100) | Measures the relationship between funds provided by shareholders (owners) and funds provided form other sources which bear interest payments. Purpose is to identify financial risk in a certain capital structure. | The higher borrowings the higher the risk. >50% risky <20% conservative. Affects cost of capital but not cash. Tax relief on interest not on dividend. Low RONA + high Gearing = good ROE. |
| Financial Structure | Return on Equity | ROE | (Profit available for distribution to shareholders/Shareholders funds x 100) | Measures the return delivered to shareholders i.e. shareholders profitability. Important to balance shareholders fund and outside borrowing (RONA & Gearing balance) | |
| Investors Criteria | Dividend Per Share | (note to accounts) | Measure of earnings attributable to each share | ||
| Investors Criteria | Dividend Cover | (Profit available for distribution to shareholders/Dividends) | Measure of the number of times dividend is covered by earnings attributable to shareholders | ||
| Investors Criteria | Dividend Yield | Gross Dividend Tield | (Dividends per share/share price) | Measure of the dividend return as a pct of the market price of share | |
| Investors Criteria | Payout ratio | Measure of how much of the earnings attributable to shareholders is paid out as dividend | |||
| Corporate | Market/book | (market value/book value of assets) | Indicates how much the market values the company compared to the assets. | High – added value due to historic performance (successful strategies) and future expectations – puts pressure on future performance. | |
| Investors Criteria | EVA | ||||
| Profitability | Profit margin | EBITDA | Measure of the market driven efficiency in terms of the average profit margin achieved by the organisation across all products/services |
Principle:
Lists financial business ratios with abbreviation, how to calculate, usefulness and major issues.
Issues:
Its important to related figures to seasonal fluctuations as these can affect the figures ass well as the organisations need for working capital (e.g. to sustain peek periods).
Basis
Source/quality of financial information
- External reports
- Internal reports
- Audited?
- Marketing coloured information e.g. via web sites
Regulatory framework
- Companies Act
- Accounting Standards
- Stock Exchange Regulation
- Other
- Changes during a period or compared to others?
Other/supplementary ways of financial analysis
Trend analysis
- However important to relate to assumptions, changes in major events and the trends of the environment, trends of market and competitors etc.
- Removes the absolute size of the figures making comparison easier
Dividends
- Stable dividends is a sign of strength
- Dividend has an information content (shows that the company is earning money)
- Shareholder do like cash income
- Maintenance of a steady dividend policy will maintain the share price
Applications:
Usefulness for management
Effective means to summarise detailed information (give overview)
Because the need to achieve a satisfactory liquidity position is vital for survival “customer is king – cash is god”.
The way that a companies total finances has been arranged is important to balance between various sources of funding including short and long term finance.
Internal view to evaluate performance of the company’s (managements) actions
- In relation to competitors
- In relation to past performance
To identify
- Changes
- Improvement possibilities
Usefulness for investors
To assist in investment decisions
External view to evaluate/benchmark performance of the company
- In relation to competitors
- In relation to past performance
To identify/evaluate
- Possible return on investment in the company
- The risk of the investment
- Compared to other companies and the market
(For lenders)
To identify
- Risks and the company’s ability to service its obligations)
Source of Financial business ratios:
Henley Business School
