INTERPRETATION

LIQUIDITY RATIOS
Liquidity ratios measure a company’s ability to meet its maturing short-term obligations.

1- Current Ratio
(Current assets / current liabilities)

This ratio reflects the number of times short-term assets cover short-term liabilities and is a fairly
accurate indication of a company's ability to service its current obligations. A higher number is preferred
because it indicates a strong ability to service short-term obligations.

2- Quick Ratio
(Current assets – inventory – prepaid expenses) / Current Liabilities

This ratio, also known as the acid test ratio, measures immediate liquidity. A higher number is preferred
because it suggests a company has a strong ability to service short-term obligations. This ratio is a more
reliable variation of the Current ratio because inventory and prepaid expenses are removed from the
calculation.

3- Cash Ratio
(Cash / Current liabilities)

The cash ratio is the ratio of a company’s total cash and cash equivalents to its current liabilities.

FINANCIAL LEVERAGE RATIOS

Financial leverage ratios, sometimes called equity or debt ratios, measure the value of equity in a
company by analyzing its overall debt picture.

1- Total Debt Ratio

(Total assets – Total equity)/ Total assets

The greater a company's leverage, the higher the ratio. Generally, companies with higher ratios are
thought to be riskier because the company must meet principal and interest on its obligations. Potential
creditors are reluctant to give financing to a company with a high debt position.
 2- Debt-equity Ratio
(Total debt / Total equity)

D/E ratio is used to measure a company's financial leverage. The D/E ratio indicates how much debt a
company is using to finance its assets relative to the value of shareholders’ equity.

3- Equity Multiplier
(Total assets / Total Equity)

It measures financial leverage. Companies finance their operations with equity or debt, so a high equity
multiplier indicates that a larger portion of asset financing is attributed to debt. The equity multiplier is a
variation of the debt ratio, and its definition of debt financing includes all liabilities.

4- Times Interest Earned Ratio

(EBIT/Interest)

Times interest earned (TIE) is a metric used to measure a company's ability to meet its debt obligations.
TIE indicates how many times a company can cover its interest charges on a pretax earnings basis. The
lower a company’s interest coverage ratio is, the more its debt expenses burden the company.

5- Cash coverage ratio

(EBITDA/Interest)

The coverage ratio is a measure of a company's ability to meet its financial obligations. In broad terms,
the higher the coverage ratio, the better the ability of the enterprise to fulfill its obligations to
its lenders. The trend of coverage ratios over time is also studied by analysts and investors to ascertain
the change in a company's financial position.

ASSET UTILIZTION, OR TURNOVER, RATIOS

1- Inventory turnover
(Cost of goods sold/Inventory)

Inventory turnover is a measure of the number of times inventory is sold or used in a time period such
as a year. The equation for inventory turnover equals the cost of goods sold divided by the
average inventory.
 2- Days’ sales in inventory
(365 day/Inventory turnover)

The days sales of inventory value (DSI) is a financial measure of a company's performance that gives
investors an idea of how long it takes a company to turn its inventory (including goods that are a work in
progress, if applicable) into sales.

3- Receivables turnover
(Sales/Accounts receivable)

Receivables turnover measures whether the amount of resources tied up debtors is reasonable and
whether the company has been reasonable in converting debtors into cash.

4- Days’ sales in receivable

(365 days/Receivables turnover)

This calculates how long it takes to collect amount from debtors. This actual collection period can be
compared with the stated credit terms of the company. If it is longer than those terms, it indicates
inefficiency in collecting debts.

5- Total asset turnover

(Sales/Total assets)

This indicates the number of times total assets are being turned over in a year. It is a representation of
the Total Assets used to generate the sales.

6- Capital intensity
(Total assets/Sales)

PROFITABILITY RATIOS

Profitability ratios measure a company’s ability to use its capital or assets to generate profits. Improving
profitability is a constant challenge for all companies and their management. Evaluating profitability ratios
is a key component in determining the success of a company. It is important to note that all profitability
ratio calculations are based on earnings before taxes.
 1- Profit margin
(Net income/Sales)

Profit margin usually refers to the percentage of revenue remaining after all costs, depreciation,
interest, taxes and other expenses have been deducted.

2- Return on assets(ROA)
(Net income/Total equity)

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA
gives a manager, investor, or analyst an idea as to how efficient a company's management is at using its
assets to generate earnings.

3- Return on equity(ROE)
(Net income/Total equity)

Return on equity (ROE) is 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.

MARKET VALUE RATIOS

1- Price-earnings ratio
(Price per share/Earnings per share)

The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share
price relative to its per-share earnings. The price-earnings ratio is also sometimes known as the price
multiple or the earnings multiple.

2- Market-to-book ratio
(Market value per share/ Book value per share)

The Market to Book ratio (M/B), is a financial valuation metric used to evaluate a company’s current
market value relative to its book value. The market value is the current stock price of all outstanding
shares.
 3- EV multiple
(Enterprise value/EBITDA)

This measurement allows investors to assess a company on the same basis as that of an
acquirer. As a rough calculation, enterprise value multiple serves as a proxy for how long it
would take for an acquisition to earn enough to pay off its costs (assuming no change in
EBITDA).

Earnings Per Share-

(EBITT / No. of Outstanding Shares)

Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of
common stock. Earnings per share serves as an indicator of a company's profitability. An increasing EPS
represents a good corporate health.

Dividend Payout Ratio-

(Dividend Paid Per Share/Earnings Per Share)

The dividend payout ratio measures the proportion of earnings paid out to shareholders as dividends.
The ratio is used to determine the ability of an entity to pay dividends, as well as its reliability in doing
so.