miércoles, 9 de abril de 2008
sábado, 5 de abril de 2008
Gearing Ratio
A general term describing a financial ratio that compares some form of owner's equity (or capital) to borrowed funds. Gearing is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds.
The higher a company's degree of leverage, the more the company is considered risky. As for most ratios, an acceptable level is determined by its comparison to ratios of companies in the same industry. The best known examples of gearing ratios include the debt-to-equity ratio (total debt / total equity), times interest earned (EBIT / total interest), equity ratio (equity / assets), and debt ratio (total debt / total assets). A company with high gearing (high leverage) is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are. A greater proportion of equity provides a cushion and is seen as a measure of financial strength.
The higher a company's degree of leverage, the more the company is considered risky. As for most ratios, an acceptable level is determined by its comparison to ratios of companies in the same industry. The best known examples of gearing ratios include the debt-to-equity ratio (total debt / total equity), times interest earned (EBIT / total interest), equity ratio (equity / assets), and debt ratio (total debt / total assets). A company with high gearing (high leverage) is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are. A greater proportion of equity provides a cushion and is seen as a measure of financial strength.
Operating Leverage Ratio
Operating Leverage Ratio
Formula to calculate operating leverage:
Operating Leverage = percent change in EBIT / percent change in sales.
Operating leverage definition and explanation:
The operating leverage reflects the extent to which a change in sales affects earnings.
A high operating leverage ratio, with a highly elastic product demand, will cause sharp earnings fluctuations.
The operating leverage ratio is included in the financial statement ratio analysis spreadsheets highlighted in the left column, which provide formulas, definitions, calculation, charts and explanations of each ratio.
The operating leverage ratio is listed in our leverage ratios.
Formula to calculate operating leverage:
Operating Leverage = percent change in EBIT / percent change in sales.
Operating leverage definition and explanation:
The operating leverage reflects the extent to which a change in sales affects earnings.
A high operating leverage ratio, with a highly elastic product demand, will cause sharp earnings fluctuations.
The operating leverage ratio is included in the financial statement ratio analysis spreadsheets highlighted in the left column, which provide formulas, definitions, calculation, charts and explanations of each ratio.
The operating leverage ratio is listed in our leverage ratios.
Capital Strucutre Ratio
Formula to calculate capital structure ratio:
Capital Structure Ratio = long term debt / (shareholders equity + long term debt).
Capital structure ratio definition and explanation:
The capital structure ratio shows the percent of long term financing represented by long term debt.
A capital structure ratio over 50% indicates that a company may be near their borrowing limit (often 65%).
Capital Structure Ratio = long term debt / (shareholders equity + long term debt).
Capital structure ratio definition and explanation:
The capital structure ratio shows the percent of long term financing represented by long term debt.
A capital structure ratio over 50% indicates that a company may be near their borrowing limit (often 65%).
martes, 1 de abril de 2008
Capital Employment Ratio
g MAIN FOCUS
g DEFINICIÓN
The capital employment ratio is also referred to as the capital employed ratio. The capital employment ratio shows the amount of sales which owner's investment in operations generates.
g FORMULA : Capital Employment Ratio
sales
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
(owners equity - non-operating assets)
g DEFINICIÓN
The capital employment ratio is also referred to as the capital employed ratio. The capital employment ratio shows the amount of sales which owner's investment in operations generates.
g FORMULA : Capital Employment Ratio
sales
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
(owners equity - non-operating assets)
Capital Acquisition Ratio
g MAIN FOCUS : CAPITAL
g DFINITION :
The capital acquisition ratio reflects the company's ability finance capital expenditures from internal sources.
g COMMENT :
A ratio of less than 1:1 (100 %) indicates that capital acquisitions are draining more cash from the business than it is generating.
g FORMULA :
(cash flow from operations - dividends)
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
cash paid for acquisitions
g DFINITION :
The capital acquisition ratio reflects the company's ability finance capital expenditures from internal sources.
g COMMENT :
A ratio of less than 1:1 (100 %) indicates that capital acquisitions are draining more cash from the business than it is generating.
g FORMULA :
(cash flow from operations - dividends)
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
cash paid for acquisitions
Equity Multiplier Ratio
g MAIN FOCUS : EQUITY
g DEFINITION :
The equity multiplier ratio discloses the amount of investment leverage.
g FORMULA : Equity Multiplier Ratio =
total asset
−−−−−−−−−−−−−−−−−−−−−−−−−
shareholders equity
g DEFINITION :
The equity multiplier ratio discloses the amount of investment leverage.
g FORMULA : Equity Multiplier Ratio =
total asset
−−−−−−−−−−−−−−−−−−−−−−−−−
shareholders equity
Long Term Debt to Shareholders Equity
g MAIN FOCUS : EQUITY
g OTHER NAME : GEARING RATIO
g DEFINITION :
A high gearing ratio is unfavourable because it indicates possible difficulty in meeting long term debt obligations.
g FORMULA : Long Term Debt to Shareholders Equity =
long term debt
−−−−−−−−−−−−−−−−−−−−−−−−−
shareholders equity
Debt to Equity Ratio
g MAIN FOCUS : DEBTS
g DEFINITION :
The debt to equity (debt or financial leverage) ratio indicates the extent to which the business relies on debt financing. Upper acceptable limit of the debt to equity (debt or financial leverage) ratio is usually 2:1, with no more than one-third of debt in long term. A high financial leverage or debt to equity ratio indicates possible difficulty in paying interest and principal while obtaining more funding. .
g FORMULA : Debt to Equity Ratio =
Short Term Debt + Long Term Debt
−−−−−−−−−−−−−−−−−−−−−−−−−
Total Shareholders Equity
g DEFINITION :
The debt to equity (debt or financial leverage) ratio indicates the extent to which the business relies on debt financing. Upper acceptable limit of the debt to equity (debt or financial leverage) ratio is usually 2:1, with no more than one-third of debt in long term. A high financial leverage or debt to equity ratio indicates possible difficulty in paying interest and principal while obtaining more funding. .
g FORMULA : Debt to Equity Ratio =
Short Term Debt + Long Term Debt
−−−−−−−−−−−−−−−−−−−−−−−−−
Total Shareholders Equity
Fixed Costs to Total Assets Ratio
g MAIN FOCUS : COSTS
g DEFINITION :
An increase in the fixed costs to total assets ratio may indicate higher fixed charges, possibly resulting in greater instability in operations and earnings.
g FORMULA : Fixed costs to total assets =
fixed costs
−−−−−−−−−−
total assets
g DEFINITION :
An increase in the fixed costs to total assets ratio may indicate higher fixed charges, possibly resulting in greater instability in operations and earnings.
g FORMULA : Fixed costs to total assets =
fixed costs
−−−−−−−−−−
total assets
Fixed Coverage
g MAIN FOCUS : COSTS
g DEFINITION :
The fixed coverage ratio indicates the ability of a business to pay fixed charges (fixed costs) when business activity falls.
g FORMULA : Fixed coverage =
earnings before interest and taxes
−−−−−−−−−−−−−−−−−−−−−−−−−
fixed charges before taxes
g DEFINITION :
The fixed coverage ratio indicates the ability of a business to pay fixed charges (fixed costs) when business activity falls.
g FORMULA : Fixed coverage =
earnings before interest and taxes
−−−−−−−−−−−−−−−−−−−−−−−−−
fixed charges before taxes
lunes, 31 de marzo de 2008
Financial Leverage
The financial leverage ratio is also referred to as the debt to equity ratio.
The financial leverage ratio indicates the extent to which the business relies on debt financing.
Upper acceptable limit of the financial leverage ratio is usually 2:1, with no more than one-third of debt in long term.
A high financial leverage ratio indicates possible difficulty in paying interest and principal while obtaining more funding.
The financial leverage ratio is included in the financial statement ratio analysis spreadsheets highlighted in the left column, which provide formulas, definitions, calculation, charts and explanations of each ratio.
The financial leverage ratio is listed in our
The financial leverage ratio indicates the extent to which the business relies on debt financing.
Upper acceptable limit of the financial leverage ratio is usually 2:1, with no more than one-third of debt in long term.
A high financial leverage ratio indicates possible difficulty in paying interest and principal while obtaining more funding.
The financial leverage ratio is included in the financial statement ratio analysis spreadsheets highlighted in the left column, which provide formulas, definitions, calculation, charts and explanations of each ratio.
The financial leverage ratio is listed in our
Net Working Capital
Net Working Capital
Net Working Capital Ratio =
--------------------------
Total Assets
Net Working Capital = Current Assets - Current Liabilities
Net Working Capital Ratio =
--------------------------
Total Assets
Net Working Capital = Current Assets - Current Liabilities
Cash Ratio
The proportion of cash and related assets to liabilities. A bank's cash ratio is that of cash to total deposits.
Current Ratio
What it is: The current ratio is the standard measure of any business' financial health. It will tell you whether your business is able to meet its current obligations by measuring if it has enough assets to cover its liabilities. The standard current ratio for a healthy business is two, meaning it has twice as many assets as liabilities.
When to use it:The current ratio should be part of your business' basic financial planning, meaning it should be tracked monthly or quarterly. By keeping a close eye on this figure, you will recognize if it begins to get out of line. This will allow you to take early action to prevent your business from ending up in a difficult position.
The formula: Current assets divided by current liabilities.
When to use it:The current ratio should be part of your business' basic financial planning, meaning it should be tracked monthly or quarterly. By keeping a close eye on this figure, you will recognize if it begins to get out of line. This will allow you to take early action to prevent your business from ending up in a difficult position.
The formula: Current assets divided by current liabilities.
Quick Ratio
What it is: Like the current ratio, the quick ratio (also sometimes called the acid test ratio) measures a business' liquidity. However, many financial planners consider it a tougher measure than the current ratio because it excludes inventories when counting assets. It calculates a business' liquid assets in relation to its liabilities. The higher the ratio is, the higher your business' level of liquidity, which usually corresponds to its financial health. The optimal quick ratio is 1 or higher.
When to use it:This is an important planning tool, especially for businesses that can tie up a lot of assets in inventory. By tracking it monthly, you can keep an eye out for negative trends that could hamper your business' ability to meet its obligations. You can also use the quick ratio to evaluate the financial health of potential customers, since it also indicates whether a business can pay off its debts quickly. A firm with a low quick ratio may be more likely to delay payments because its assets are tied up elsewhere.
Tip: Take control of your business spending by using charge cards which require you to pay your balance in full each month
The formula: (Current assets less inventories) divided by current liabilities.
When to use it:This is an important planning tool, especially for businesses that can tie up a lot of assets in inventory. By tracking it monthly, you can keep an eye out for negative trends that could hamper your business' ability to meet its obligations. You can also use the quick ratio to evaluate the financial health of potential customers, since it also indicates whether a business can pay off its debts quickly. A firm with a low quick ratio may be more likely to delay payments because its assets are tied up elsewhere.
Tip: Take control of your business spending by using charge cards which require you to pay your balance in full each month
The formula: (Current assets less inventories) divided by current liabilities.
Liquidity Ratios Definition
A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.
Common liquidity ratios include the current ratio, the quick ratio and the operating cash flow ratio. Different analysts consider different assets to be relevant in calculating liquidity. Some analysts will calculate only the sum of cash and equivalents divided by current liabilities because they feel that they are the most liquid assets, and would be the most likely to be used to cover short-term debts in an emergency.A company's ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern.
Common liquidity ratios include the current ratio, the quick ratio and the operating cash flow ratio. Different analysts consider different assets to be relevant in calculating liquidity. Some analysts will calculate only the sum of cash and equivalents divided by current liabilities because they feel that they are the most liquid assets, and would be the most likely to be used to cover short-term debts in an emergency.A company's ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern.
domingo, 30 de marzo de 2008
Financialt Ratios
In finance, a financial ratio or accounting ratio is a ratio of selected values on an enterprise's financial statements. There are many standard ratios used to evaluate the overall financial condition of a corporation or other organization. Financial ratios are used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Security analysts use financial ratios to compare the strengths and weaknesses in various companies.[1] If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.
Values used in calculating financial ratios are taken from the balance sheet, income statement, cash flow statement and (rarely) statement of retained earnings. These comprise the firm's "accounting statements" or financial statements.
Ratios are always expressed as a decimal value, such as 0.10, or the equivalent percent value, such as 10%.
Financial ratios quantify many aspects of a business and are an integral part of financial statement analysis. Financial ratios are categorized according to the financial aspect of the business which the ratio measures. Liquidity ratios measure the availability of cash to pay debt.[2] Activity ratios measure how quickly a firm converts non-cash assets to cash assets.[3] Debt ratios measure the firm's ability to repay long-term debt.[4] Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return.[5] Market ratios measure investor response to owning a company's stock and also the cost of issuing stock.[6]
Financial ratios allow for comparisons
between companies
between industries
between different time periods for one company
between a single company and its industry average
The ratios of firms in different industries, which face different risks, capital requirements, and competition are not usually comparable.
Values used in calculating financial ratios are taken from the balance sheet, income statement, cash flow statement and (rarely) statement of retained earnings. These comprise the firm's "accounting statements" or financial statements.
Ratios are always expressed as a decimal value, such as 0.10, or the equivalent percent value, such as 10%.
Financial ratios quantify many aspects of a business and are an integral part of financial statement analysis. Financial ratios are categorized according to the financial aspect of the business which the ratio measures. Liquidity ratios measure the availability of cash to pay debt.[2] Activity ratios measure how quickly a firm converts non-cash assets to cash assets.[3] Debt ratios measure the firm's ability to repay long-term debt.[4] Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return.[5] Market ratios measure investor response to owning a company's stock and also the cost of issuing stock.[6]
Financial ratios allow for comparisons
between companies
between industries
between different time periods for one company
between a single company and its industry average
The ratios of firms in different industries, which face different risks, capital requirements, and competition are not usually comparable.
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