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I/ Liquidity ratios : measure the short term solvency of financial position of a firm.

These
ratios are calculated to comment upon the short term paying capacity of a concern or the firm's
ability to meet its current obligation

1/ Current ratio = current assets / current liabilities


- Current ratio is may be defined as the relationship between current assets and current
liabilities. This ratio is also known as "working capital ratio". It is a measure of general liquidity
and is most widely used to make the analysis for short term financial position or liquidity of a
firm. It is calculated by dividing the total of the current assets by total of the current liabilities.
- Current assets is A balance sheet item which equals the sum of cash and cash equivalents,
accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that
could be converted to cash in less than one year. A company's creditors will often be interested
in how much that company has in current assets, since these assets can be easily liquidated in
case the company goes bankrupt. In addition, current assets are important to most companies as
a source of funds for day-to-day operations.
- Current liabilities is A balance sheet item which equals the sum of all money owed by a
company and due within one year. also called payables or current debt.

2/ Quick ratio ( or liquid ratio) = quick asset / current liabilities


* Quick assets = current assets – inventory
- Quick ratio is the ratio of liquid assets to current liabilities. The true liquidity refers to the
ability of a firm to pay its short term obligations as and when they become due.
- Quick assets is Cash and other assets which can or will be converted into cash fairly soon,
such as accounts receivable and marketable securities; or equivalently, current assets minus
inventory.
- Inventory is :
a/ A company's merchandise, raw materials, and finished and unfinished products which
have not yet been sold. These are considered liquid assets, since they can be converted into cash
quite easily. There are various means of valuing these assets, but to be conservative the lowest
value is usually used in financial statements
b/ The securities bought by a broker or dealer in order to resell them. For the period that
the broker or dealer holds the securities in inventory, he/she is bearing the risk related to the
securities, which may change in price.

II/ Efficiency Ratio is operating espenses divided by free income plus tax equivalent net
interest income.

1/ Inventory Turnover Ratio: Inventory turnover ratio indicates the number of time the
stock has been turned over during the period and evaluates the efficiency with which a firm is
able to manage its inventory. This ratio indicates whether investment in stock is within proper
limit or not.

Inventory Turnover Ratio = cost of good sold / average inventory


- Cost of good sold (COGS): An income statement figure which reflects the cost of obtaining
raw materials and producing finished goods that are sold to consumers.
*Cost of Goods Sold = Beginning Merchandise Inventory + Net Purchases of Merchandise
- Ending Merchandise Inventory
- Average inventory: average of beginning and ending inventory.
*Average inventory = {Inventory (current period) + Inventory (prior period)} ÷ 2.

2/ Total Assets Turnover = Net Sales / Total Assets


-Total Assets Turnover : Measures the activity of the assets and the ability of the firm to
generate sales through the use of the asset.
- Net sale: Gross sales revenue less returns and discounts, the amount shown in an income
statement under sales revenue.
- Total assets: The sum of current and long-term assets owned by a person, company, or
other entity.

III/ Profitiability Ratio : measures that indicate how well a firm is performing in terms of its
ability to generate profit.

1/ Gross Profit Ratio : is the ratio of gross profit to net sales expressed as a percentage. It
expresses the relationship between gross profit and sales.

Gross Profit Ratio = [( Gross Profit / Net Sales )*100]

- Gross profit:(alternative term for gross income) amount by which sales revenue exceeds
production costs (cost of sales). Though operating income (gross income less depreciation and
taxes) gives a more accurate picture of a firm's profitability, gross income provides a top-line
view of a firm's production or (in case of a trading firm) sales related cost structure. It is a
measure of how well (or badly) a firm is utilizing its capital, capacity, and other resources, and
shows its competitive strengths and weaknesses in comparison with other firms in the same
industry. A high gross income means stability in times of economic downturn because the firm
can afford to cut prices; a low gross income may mean low creditworthiness or inability to fight
off competition. A falling gross income shows cost of production is rising faster than the selling
price, or that inventory is shrinking due to stealing or spoilage. It is allocated to employees as
wages, to lenders as interest, to investors as dividends, to government as taxes, and to the firm
as reinvestment. When expressed as a percentage of cost of sales, it is called gross margin.
Called also gross profit or value added.

2/ Operating Margin : Operating ratio measures the cost of operations per dollar of sales.
This is closely related to the ratio of operating profit to net sales

Operating Margin = Operating Profit / Net Sales


- Operating profit: (Alternative term for operating income.) income resulting from a firm's
primary business operations, excluding extraordinary income and expenses. Also called
earnings before interest and taxes (EBIT), it gives a more accurate picture of a firm's
profitability than gross income. Also called operating margin. * Formula: Sales revenue -
(Cost of sales + Operating expenses).

3/ Return on Assets (ROA) : return on assets (ROA) percentage shows how profitable a
company's assets are in generating revenue.

ROA = Net Income / Average Total Assets

- Net income: total revenue in an accounting period less all expenses during the same period.
If income taxes and interest are not deducted, it is called operating profit (or Loss, as the case
may be). Also called earnings, net earnings, or net profit.
- Average total assets: average of the aggregate assets during a two year period.
* = Total assets (current year) + Total assets (previous year) ÷ 2.

4/ Return on Equity (ROE): the amount of net income returned as a percentage of


shareholders equity. Return on equity measures a corporation's profitability by revealing how
much profit a company generates with the money shareholders have invested.

ROE = Net Income / Shareholder’ Equity

- Shareholders’ equity: capital employed in a firm, computed by deducting the book value of
the liabilitiesfrom the book value of the assets.

5/ Dividend Payout Ratio: measures the portion of current earning per common share being
paid out in dividend .

Dividend Payout Ratio = Dividends / Net Income

- Dividends: Share of the after-tax profit of a firm, distributed to its stockholders


(shareholders) according to the number and class of stock (shares) held by them.

IV/ Capital Structure Ratio: framework of different types of financing employed by a firm
to acquire resources necessary for its operations and growth. Commonly, it comprises of
stockholders' investments (equity capital) and long-term loans (loan capital), but, unlike
financial structure, does not include short-term loans (such as overdraft) and liabilities (such as
trade credit).
1/ Fixed Assets Ratio:
Fixed assets ratio = Fixed Assets / Total Assets

- Fixed assets: Land, buildings, equipment, machinery, vehicles, leasehold improvements,


and other such items. Fixed assets are not consumed or sold during the normal course of a
business but their owner uses them to carry on its operations. On a balance sheet, these assets
are shown at their book value (purchase price less depreciation).

2/ Net Worth Ratio :


Net worth ratio = Net Worth / Total Asset

- Net worth: value of a firm's to its owners (stockholders/shareholders) as shown on its


balance sheet. It is the sum of the issued share capital, retained earnings, and capital gains. Also
called net value.

Valuation

1) Return On Invested Capital - ROIC

What Does Return On Invested Capital - ROIC Mean?


A calculation used to assess a company's efficiency at allocating the capital under its control to profitable
investments. The return on invested capital measure gives a sense of how well a company is using its money to
generate returns. Comparing a company's return on capital (ROIC) with its cost of capital (WACC) reveals
whether invested capital was used effectively.

The general equation for ROIC is as follows:


Also known as "return on capital"
Investopedia explains Return On Invested Capital - ROIC
Total capital includes long-term debt, and common and preferred shares. Because some companies receive
income from other sources or have other conflicting items in their net income, net operating profit after tax
(NOPAT) may be used instead.

ROIC is always calculated as a percentage. Invested capital can be in buildings, projects, machinery, other
companies etc. One downside of return on capital is that it tells nothing about where the return is being
generated. For example, it does not specify whether it is from continuing operations or from a one-time event,
such as a gain from foreign currency transactions.

2) Weighted Average Cost of Capital - WACC

What Does Weighted Average Cost Of Capital - WACC Mean?


A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital
sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC
calculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as
an increase in WACC notes a decrease in valuation and a higher risk.

The WACC equation is the cost of each capital component multiplied by its proportional weight and then
summing:

Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate

Businesses often discount cash flows at WACC to determine the Net Present Value (NPV) of a project, using
the formula:

NPV = Present Value (PV) of the Cash Flows discounted at WACC.


Investopedia explains Weighted Average Cost Of Capital - WACC
Broadly speaking, a company’s assets are financed by either debt or equity. WACC is the average of the costs
of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a
weighted average, we can see how much interest the company has to pay for every dollar it finances.

A firm's WACC is the overall required return on the firm as a whole and, as such, it is often used internally by
company directors to determine the economic feasibility of expansionary opportunities and mergers. It is the
appropriate discount rate to use for cash flows with risk that is similar to that of the overall firm.