GEROBOS [t] +27 12 345 8484 [f ] +27 12 345 8406 [e]
[email protected] [a] 24 Victoria Link l Route 21 Corporate Park l Irene
Duncan Kirkman l Faan van Biljon l Dylan Smith
Basic Financial Ratios for Investment Analysis 1. Liquidity Ratios Measures firm ability to meet its short term debt obligations. Describes firm ability to pay Higher is better. short term debts with short Ratio of <1 indicates that firm would not meet short term term assets. payments if they became due ‘now’. 2. Leverage Ratios Measures proportion of firm value made up of debt.
Current Ratio
Debt Ratio Debt to Equity
Quick Indicator of company’s indebtedness
Lower is better.
Ratio of firm use of Debt vs. Equity to finance assets.
Lower is better. Industry comparable.
3. Asset Turnover Ratios Measures efficiency of firm’s use of assets
Inventory Turnover Receivables Turnover
Gross Margin
Operating Margin
Profit Margin Return on Assets Return on Equity
Price to Sales
1
Indicates how frequently inventory is replaced per accounting period.
Higher is better. Industry and firm prior period comparable.
Indicates how well a co. does Higher is better. at collecting money from Industry and firm prior period comparable. debtors. 4. Profitability Profitability Ratios Measures how well firm uses assets to add to shareholder value and make profit. Shows ratio of Sales Revenue Higher is better. that the co. retains after fixed Industry and firm prior period comparable. 2 direct costs of production are eg: Software firms = high margins vs Manufacturing firms = incurred. low margins. Shows ratio of Sales Revenue Higher is better. that the co. retains after Industry and firm prior period comparable. 3 Gives indication of firm’s ability to meet fixed costs direct and indirect costs of production are incurred. (interest on debt) Higher is better. Shows ratio of revenue that Industry and firm prior period comparable. the co. gets to retain. Higher profit margin indicates a co. that controls cost Ie: PROFIT better than competitors and is more profitable.
Measures efficiency of firm at turning assets into earnings.
Higher is better. Industry and firm prior period comparable.
Measures firm ability to turn Higher is better. shareholder investment into Industry and firm prior period comparable. earnings. 5. Valuation Ratios Mechanism to compare stock price with firm performance. Lower is better - indicates undervalued undervalued issue. Measures stock price in Industry Comparable. Comparable. relation to Sales. Varies greatly between industries, limited explanatory power.
1
Cost of Goods Sold Cost that can be completely attributed to the production of a good /service. 3 Variable costs of production. (Raw Materials, Wages etc) 2
GEROBOS [PTY] LTD
2010/014308/07 FSP 42976 An Authorised Financial Services Provider
Please see the following terms, all of which it is assumed you have understood and acknowledged. All data, particularly rates and price quotations, contained herein are provided only for informational purposes and are subject to market fluctuations. Gerobos provides no warranty as to the reasonableness, completeness completeness or accuracy thereof. This report is not an offer to conclude or enter into any transaction and must not be considered as advice. We offer no guarantee as to the performance of any transactions contained and you shall not enter into any transactions or otherwise with a reliance on the information here in. All investment decisions made should be based on one’s own independent judgment and attri butes.
GEROBOS [t] +27 12 345 8484 [f ] +27 12 345 8406 [e]
[email protected] [a] 24 Victoria Link l Route 21 Corporate Park l Irene
Price to Book Price to Earnings (P/E)
4
⁄
PEG Ratio
Dividend Yield
5
Duncan Kirkman l Faan van Biljon l Dylan Smith
Measures stock price in relation to equity invested. Measures stock price in relation to firm’s earnings, ie: issue price in relation to profit created. Measures stock price in relation to firm’s earnings growth.
Lower is better – indicates undervalued issue. Mostly applicable to capital intensive firms, limited explanatory power. High PE indicates issue might be overvalued &/or investors expect higher earnings in future. (converse may be true when PE is low) Market comparable. High PEG indicates issue might be overvalued. (converse may be true when PEG is low) Market comparable. Often preferred to PE.
Measures return from issue excluding capital gains.
Higher is better. Market comparable.
Please Note: None of the above ratios are designed to singularly capture the full outlook for any share, firm or investment and should never be the sole basis for investment decisions. It is rather advised that a broad and detailed mix of fundamental valuation techniques and ratios are employed in the investment analysis process.
4
May be Trailing (earnings over last 12 months) or Leading (projected earnings using growth rate for following 12 months)
5
GEROBOS [PTY] LTD
2010/014308/07 FSP 42976 An Authorised Financial Services Provider
Please see the following terms, all of which it is assumed you have understood and acknowledged. All data, particularly rates and price quotations, contained herein are provided only for informational purposes and are subject to market fluctuations. Gerobos provides no warranty as to the reasonableness, completeness completeness or accuracy thereof. This report is not an offer to conclude or enter into any transaction and must not be considered as advice. We offer no guarantee as to the performance of any transactions contained and you shall not enter into any transactions or otherwise with a reliance on the information here in. All investment decisions made should be based on one’s own independent judgment and attri butes.
