An Introduction to Capital Structure
A company's capital structure is one of the most important decisions management has to make because it influences everything from the firm's risk profile to the financial ratios such as return on equity and interest coverage. In this resources, we examine why capital structure matters and the components that make up the capital structure of any company, no matter how large or small.
Price to Cash Flow Ratio
Some investors prefer to focus on a financial ratio known the price to cash flow ratio instead of the more famous price to earnings ratio (or p/e ratio for short). Why do they prefer the price to cash flow ratio and why is it better for some companies and industry than its more famous counterpart? Sit back, relax, and grab a cup of coffee because you're about to learn everything you ever wanted to know about why it is more important than the price to earnings ratio.
The 5 Categories of Financial Ratios
There are five categories of financial ratios into which most calculations fall. Here, we explain what they are to help you understand how to organize your own financial analysis when valuing a stock or bond.
Using the PEG Ratio to Find Hidden Stock Gems
The PEG ratio is a modified form of the price to earnings ratio and can help you factor in the underlying growth in a company's earnings per share to determine its relative value. Many of the most successful investors including Peter Lynch use the PEG ratio to help value stocks.
Enterprise Value - Determining the Takeover Value of a Company
Enterprise value is the takeover value of a company. Enterprise value is calculated by adding a corporation’s market capitalization, preferred stock, and outstanding debt together and then subtracting out the cash and cash equivalents
Return on Equity - The DuPont Model
The best way to perform a return on equity calculation, or ROE as it is sometimes abbreviated, is to do what is known as a DuPont analysis.
Asset Turnover Ratio - Financial Ratio #1
The asset turnover financial ratio calculates the total sales for each dollar of asset a company owns. It measures a company's efficiency in using its assets.
Current Ratio - Financial Ratio #2
The current ratio is one of the most famous of all financial ratios. It serves as a test of a company's financial strength and relative efficiency [i.e., does a company have too much cash on hand or not enough?]
Debt to Equity Ratio - Financial Ratio #3
The debt to equity financial ratio is a measure of the total debt a company owes compared to the equity of the shareholders. It tells you just how much of the capitalization is the owners vs. the creditors.
Gross Profit Margin Ratio - Financial Ratio #4
This financial ratio tends to remain stable over time. Significant fluctuations can be a sign of fraud or financial irregularities.
Gross Profit - Financial Ratio #5
Gross profit is the the total revenue subtracted by the cost of generating that revenue. An investor must know a company's gross profit in order to calculate a financial ratio known as the gross profit margin.
Interest Coverage Ratio - Financial Ratio #6
The interest coverage ratio has huge implications for bond and preferred stock investors in particular. This financial ratio tells the investor the number of times the earnings before interest and taxes can pay, or "cover", the interest payment the company makes on its debt.
Inventory Turn Ratio - Financial Ratio #7
This financial ratio tells an investor how many times a business turns its inventory over a period of time. It allows you to see if a company has too many of its assets tied up in inventory and is heading for financial trouble.
Net Profit Margin Financial Ratio - Financial Ratio #8
The net profit margin tells you how much money a company makes for every $1 in revenue.
Operating Profit Margin Ratio - Financial Ratio #9
The operating profit margin is a financial ratio that measures the efficiency of management.
Quick Test - Financial Ratio #10
This financial ratio is known as the quick test, acid test, or liquidity test; all mean the same thing. Of all the financial ratios, it is the most difficult and stringent measure of a company's strength and liquidity.
Receivable Turn Ratio - Financial Ratio #11
The receivable turns financial ratio tells you how many times a company or business collects its accounts receivable in a period of time.
Return on Assets Ratio - Financial Ratio #12
Return on assets financial ratio reveals how asset intensive a business is. There are two ways to calculate ROA.
Return on Equity - ROE Financial Ratio - Financial Ratio #13
The return on equity is my favorite financial ratio. It reveals how much profit a company earned in comparison to the total amount of shareholder equity on the balance sheet. For those of you interested in long-term investing with rich rewards, companies that have high return on equity ratios can provide the biggest payoff. Read and print this article!
Working Capital Per Dollar of Sales - Financial Ratio #14
This financial ratio tells an investor the amount of working capital a company should keep on hand.
Working Capital - Financial Ratio #15
Working capital is perhaps more important than many of the financial ratios. It can be calculated by subtracting current liabilities from the current assets.
Financial Ratio Guide
Before you can begin investing in individual stocks, you need to learn how to calculate financial ratios. Even if you decide to get your financial ratios from your broker or financial site, you still need to know what they represent. Otherwise, you may make a mistake and buy into a company with too much debt, not enough cash to survive, or low profitability. This guide to financial ratios wil…