Financial Ratios

365 / Inventory Turnover
Low number may indicate that there is not enough stock on hand.

365 / Receivables Turnover
Implies how long it takes for a company's customer to pay its bill

CFO / (Book value of long term debt + Present value of operating leases)
Determine the ability of a company to meet its debt obligations

Average receivables collection period + Average inventory processing period
High cash conversion cycles are considered undesirable because they imply that the company has an excessive amount of capital investment in the sales process

(Cash + Marketable securities) / Current liabilities
Most conservative liquid measures

Standard deviation of EBIT / Mean EBIT
(shouldn’t be too high; use between five and ten years of data)

Current assets / Current liabilities
Higher current ratio implies that a company will be able to pay its short term bills

Total long term debt (LTD) / Total equity
(LTD = Long term liabilities + deferred taxes + present value of lease obligations)

Dividends declared / Operating income after taxes

Net sales / Average equity
Measure of the employment of owner’s capital

Net sales / Average net fixed assets
Measures the utilization of fixed assets

EBIT + ELIE / (Gross Interest Expense ELIE)
(ELIE= Estimated lease interest expense; the higher the coverage ratio, the better the firm is able to manage its current debt levels or that the firm has unused borrowing capacity)

Net sales – COGS

Gross profit / Net sales
(Shouldn’t be too low)

EBIT / Interest expense
Lower ratio implies that the firm will have difficulty meeting its debt payments