Value Investing

Ratio Analysis – Excel Spread Sheet

To assist you in comparing companies within the same industry. You will find notes to assist in calculations.

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Ratio Analysis
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Profitability Ratios

RatioMethod of CalculationSignificance of each ratio
Return on Assetsprofit / average total assetsMeasures return earned through total assets provided by both creditors and owners
Return on equityprofit - preference dividends / average ordinary equityMeasures return earned on assets provided by owners
Net profit marginNet profit / RevenueMeasures net profitability of each dollar of sales
Earnings per shareNet profit - preference dividends /  weighted average number of ordinary shares issuedMeasures profit earned on each ordinary share
Price-earnings ratioMarket price per ordinary share / earnings per sharemeasures the amount investors are paying for a dollar of earnings
Earnings yieldEarnings per ordinary share / market price per ordinary shareMeasures the return to an investors purchasing shares at the current market price
Dividend YieldAnnual divdiend per ordinary share / market price per ordinary shareMeasures the return to an shareholders based on current market price
Dividend PayoutTotal dividends to ordinary shareholders / profit - preference dividendsMeasures the percentage of profits paid out to ordinary shareholders

Liquidity Ratios

RatioMethod of CalculationSignificance of each ratio
Current RatioCurrent Assets / Current LiabilitesA measure of short term liquidity. Indicates the ability of an entity to meet its short-term debts from currrent assets.
Quick RatioCash assets + Receivables / Current LiabilitiesA more rigous measure of short term liquidity. Indices the ability of the etity to meet unexpected demands from liquid current assets
Receivables TurnoverNet Sales Revenue / Average Receivables BalanceMeasures the effectiveness of collections; used to evaulate whether receivables balance is excessive
Average Collection PeriodAverage Receivables Balance X 356 / Net Sales RevenueMeasures the average number of days taken by the entity to collect its receivables
Inventory TurnoverCost of Sales / Average Inventory BalalnceIndicates the liquidity of inventory. Measures the number of times invenotru was sold on average during the period

Financial Stability

RatioMethod of CalculationSignificance of each ratio
Debt ratioTotal liabilites / total assetsMeasures percentage of assets provided by creditors and the extent of using gearing
Equity RatioTotal equity / total assetsMeasures percentage of assets provided by shareholders and the extent of using gearing
Capitalisation ratioTotal assets / total equityRevenue / Average total assets
Times interest earnedProfit before tax + Net finance costs / Net finance costsMeasures the ability of the entity to meet its interest payments on borrowings out of current profits
Asset turnover ratioRevenue / Average total assetsMeasures the effectiveness of an enitty in using its assets during the period

Cash Sufficiency Ratio

RatioMethod of CalculationSignificance of each ratio
Cash flow adequacyCash flow from operating activities / repayment of long term borrowings + asseets acquired +dividends paidMeasures the entity's ability to cover its main cash requirements
Repayment of long term borrowingsRepayment of long term borrowings / cash flows from operating activitiesMeasures the entity's ability to cover its long term debt out of cash from operating activities
Dividend paymentDividends paid / cash flows from operating activitiesMeasures  the entity;s ability to cover its dividend payments
ReinvestmentPurchase of property, plant and equipement / cash flows from operating activitiesMeasures the entity's ability to pay for it's non current asets out of cash from operating activities. And provides you insight as to how much is required to reinvest back into the business just to maintain current revenues.
Debt coverageNon current liabilites / cash flows from operating activitiesMeasures the payback period for coverage of long term debt

Cash Flow Efficiency Ratios

RatioMethod of CalculationSignificance of each ratio
Cash flow to revenueCash flows from operating activities / revenueMeasures ability to convert revenue into cash flows
Operations IndexCash flows from operating activities / profitAn index measuring the relationship between profit and operating cash flows
Cash flow return on assetsCash flow from operating activities / average total assetsMeasures the operating cash flow return on assets before interest and tax

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