What are the types of market value ratios? Explain with formula and example?

 

Market value ratios, also known as valuation ratios, are used to assess the value of a company's stock compared to its financial performance. Some common market value ratios include:

Price-to-Earnings (P/E) Ratio: 

It measures the price of a stock relative to its earnings per share. The formula is: 

P/E Ratio = Market Price per Share/Earnings per Share (EPS)

Example: If a stock has a market price of $50 and an EPS of $5, the P/E ratio is 10.

Price-to-Book (P/B) Ratio: 

It measures the market value of a company's stock relative to its book value. The formula is: 

P/B Ratio = Market Price per Share/Book Value per Share

Example: If a stock has a market price of $40 and a book value per share of $10, the P/B ratio is 4.

Price-to-Sales (P/S) Ratio: 

It measures the market value of a company's stock relative to its revenue. The formula is: 

P/S Ratio = Market Price per Share/Revenue per Share

Example: If a stock has a market price of $60 and revenue per share of $12, the P/S ratio is 5.

Dividend Yield: 

It measures the amount of annual dividend income received in relation to the stock price. The formula is: 

Dividend Yield = Annual Dividend per Share/Market Price per Share

Example: If a stock has an annual dividend per share of $2 and a market price of $50, the Dividend Yield is 4%.

What are the types of turnover ratios? Explain with formula and example?

 

There are several types of turnover ratios that are used to measure the efficiency of a company in using its assets, inventory and capital. Some of the most commonly used turnover ratios are:

Asset Turnover Ratio: 

It measures the efficiency of a company in using its assets to generate revenue. The formula is: 

Asset Turnover Ratio = Net Sales/Total Assets

Example: If a company has $500,000 in net sales and $1,000,000 in total assets, the Asset Turnover Ratio is 0.5.

Inventory Turnover Ratio: 

It measures how many times a company's inventory is sold and replaced over a given period. The formula is: 

Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory

Example: If a company's cost of goods sold is $200,000 and its average inventory is $100,000, the Inventory Turnover Ratio is 2.

Accounts Receivable Turnover Ratio: 

It measures the efficiency of a company in collecting its accounts receivable. The formula is: 

Accounts Receivable Turnover Ratio = Net Credit Sales/Average Accounts Receivable

Example: If a company's net credit sales are $300,000 and its average accounts receivable is $150,000, the Accounts Receivable Turnover Ratio is 2.

Fixed Asset Turnover Ratio: 

It measures the efficiency of a company in using its fixed assets to generate revenue. The formula is: 

Fixed Asset Turnover Ratio = Net Sales/Net Fixed Assets

Example: If a company has $600,000 in net sales and $300,000 in net fixed assets, the Fixed Asset Turnover Ratio is 2.

What are the types of debt ratios? Explain with formula and example?

Debt ratios are financial metrics that measure a company's level of debt and its ability to repay that debt. The following are some common types of debt ratios:

1. Debt-to-Asset ratio: 

   This ratio measures the proportion of a company's assets financed by debt. The formula is: 

   Debt-to-Asset ratio = Total liabilities / Total assets. 

   For example, if a company has total liabilities of $200,000 and total assets of $1,000,000, its debt-to-asset ratio is 0.2 (200,000 / 1,000,000). This ratio indicates the percentage of assets financed by debt, the higher the ratio, the more leveraged the company is and the higher the risk of default.

2. Debt-to-Equity Ratio: 

   This ratio measures the proportion of a company's equity financed by debt. The formula is: 

   Debt-to-Equity ratio = Total liabilities / Total equity. 

   For example, if a company has total liabilities of $200,000 and total equity of $1,000,000, its debt-to-equity ratio is 0.2 (200,000 / 1,000,000). This ratio indicates how much debt a company is using to finance its assets, the higher the ratio, the more leveraged the company is and the higher the risk of default.

3. Interest Coverage Ratio: This ratio measures a company's ability to pay the interest on its debt. The formula is: 

   Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense. 

   For example, if a company has EBIT of $1,000,000 and interest expense of $200,000, its Interest Coverage Ratio is 5 (1,000,000 / 200,000). This ratio is used to determine a company's ability to pay the interest on its debt, the higher the ratio, the better the company is at covering its interest expenses.

4. Times Interest Earned Ratio: 

   This ratio measures a company's ability to pay the interest on its debt. The formula is: 

   Times Interest Earned Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense. 

   For example, if a company has EBIT of $1,000,000 and interest expense of $200,000, its Times Interest Earned Ratio is 5 (1,000,000 / 200,000). This ratio is used to determine a company's ability to pay the interest on its debt, the higher the ratio, the better the company is at covering its interest expenses.

What are the types of activity ratios? Explain with formula and example?

 

Activity ratios are financial metrics that measure a company's efficiency and effectiveness in managing its resources, specifically its assets. The following are some common types of activity ratios:

1. Inventory Turnover: 

   This ratio measures how quickly a company is able to sell its inventory. The formula is: 

   Inventory turnover = Cost of goods sold / Average inventory. 

   For example, if a company's cost of goods sold is $1,000,000 and its average inventory is $200,000, its inventory turnover is 5 (1,000,000 / 200,000).

2. Accounts Receivable Turnover: 

   This ratio measures how quickly a company is able to collect payment from its customers. The formula is: 

   Accounts receivable turnover = Net credit sales / Average accounts receivable. 

   For example, if a company's net credit sales is $1,000,000 and its average accounts receivable is $200,000, its accounts receivable turnover is 5 (1,000,000 / 200,000).

3. Days Sales Outstanding (DSO): 

   This ratio measures how long it takes for a company to collect payment from its customers. The formula is: 

   DSO = (Accounts receivable / (Net credit sales / 365)) days. 

   For example, if a company's accounts receivable is $200,000 and its net credit sales is $1,000,000, its DSO is 61.68 days (200,000 / (1,000,000 / 365) days).

4. Fixed Asset Turnover: 

   This ratio measures how effectively a company is using its fixed assets (property, plant, and equipment) to generate sales. The formula is: 

   Fixed asset turnover = Net sales / Average fixed assets. 

   For example, if a company's net sales is $1,000,000 and its average fixed assets is $200,000, its fixed asset turnover is 5 (1,000,000 / 200,000).

5. Total Asset Turnover: 

   This ratio measures how effectively a company is using all of its assets to generate sales. The formula is: 

   Total asset turnover = Net sales / Average total assets. 

   For example, if a company's net sales is $1,000,000 and its average total assets is $200,000, its total asset turnover is 5 (1,000,000 / 200,000).

6. Debt-to-Asset ratio: 

   This ratio measures the proportion of a company's assets financed by debt. The formula is: 

   Debt-to-Asset ratio = Total liabilities / Total assets. 

   For example, if a company has total liabilities of $200,000 and total assets of $1,000,000, its debt-to-asset ratio is 0.2 (200,000 / 1,000,000).

7. Debt-to-Equity Ratio: 

   This ratio measures the proportion of a company's equity financed by debt. The formula is: 

   Debt-to-equity ratio = Total liabilities / Total equity. 

   For example, if a company has total liabilities of $200,000 and total equity of $1,000,000, its debt-to-equity ratio is 0.2 (200,000 / 1,000,000).

8. Working Capital Ratio: 

   This ratio measures a company's ability to meet its short-term obligations. The formula is: 

   Working capital ratio = Current assets / Current liabilities. 

   For example, if a company has current assets of $200,000 and current liabilities of $100,000, its working capital ratio is 2 (200,000 / 100,000).

What are the types of profitability ratios? Explain with formula and example?

 

Profitability ratios are a group of financial metrics that are used to measure a company's ability to generate profits. There are several different types of profitability ratios, including:

Gross Profit Margin: 

This ratio measures the percentage of revenue that a company retains after deducting the cost of goods sold (COGS). It is calculated by dividing gross profit by revenue. A higher ratio indicates that a company is generating more profit from its sales.

Example: A company has revenue of $1,000,000 and COGS of $800,000. The gross profit margin would be calculated as: 

Gross Profit Margin = Gross Profit / Revenue Gross Profit Margin 

= (1,000,000 - 800,000) / 1,000,000

 Gross Profit Margin = 0.2 or 20% 

This ratio of 20% indicates that the company is retaining 20 cents of every dollar of revenue as gross profit.

Operating Profit Margin: 

This ratio measures the percentage of revenue that a company retains after deducting all operating expenses, including COGS and SG&A (selling, general and administrative expenses). It is calculated by dividing operating profit by revenue. A higher ratio indicates that a company is generating more profit from its sales after accounting for all operating expenses.

Example: A company has revenue of $1,000,000, COGS of $800,000 and SG&A of $200,000. The operating profit margin would be calculated as: 

Operating Profit Margin = Operating Profit / Revenue 

Operating Profit Margin = (1,000,000 - 800,000 - 200,000) / 1,000,000 

Operating Profit Margin = 0.1 or 10% 

 

This ratio of 10% indicates that the company is retaining 10 cents of every dollar of revenue as operating profit after accounting for all operating expenses.

Net Profit Margin: 

This ratio measures the percentage of revenue that a company retains after deducting all expenses, including COGS, SG&A, and taxes. It is calculated by dividing net income by revenue. A higher ratio indicates that a company is generating more profit from its sales after accounting for all expenses.

Example: A company has revenue of $1,000,000, COGS of $800,000, SG&A of $200,000 and taxes of $100,000. 

The net profit margin would be calculated as: 

Net Profit Margin = Net Income / Revenue 

Net Profit Margin = (1,000,000 - 800,000 - 200,000 - 100,000) / 1,000,000 

Net Profit Margin = 0.05 or 5% This ratio of 5% indicates that the company is retaining 5 cents of every dollar of revenue as net profit after accounting for all expenses.

Return on Equity (ROE): 

This ratio measures the return that a company generates for its shareholders. It is calculated by dividing net income by shareholder's equity. A higher ratio indicates that a company is generating more profits for its shareholders.

Example: A company has net income of $100,000 and shareholder's equity of $1,000,000. The ROE would be calculated as: 

ROE = Net Income / Shareholder's Equity 

ROE = 100,000 / 1,000,000 ROE = 0.1 or 10% 

This ratio of 10% indicates that the company is generating a 10% return for its shareholders.

What are the types of liquidity ratios? explain with formula and example?

 

There are three main types of liquidity ratios that are commonly used to evaluate a company's short-term financial health:

Current Ratio: 

This ratio measures a company's ability to pay off its short-term obligations using its current assets. It is calculated by dividing current assets by current liabilities. A ratio of 1 or higher is considered healthy, indicating that a company has enough liquid assets to pay off its short-term debts.

Example: A company has current assets of $1,000,000 and current liabilities of $800,000. The current ratio would be calculated as: Current Ratio = Current Assets / Current Liabilities Current Ratio = 1,000,000 / 800,000 Current Ratio = 1.25 This ratio of 1.25 indicates that the company has 1.25 times the amount of current assets as current liabilities, which is considered healthy.

Quick Ratio: 

Similar to the current ratio, the quick ratio measures a company's ability to pay off its short-term obligations, but it excludes inventory from current assets because it is considered the least liquid of all current assets. It is calculated by dividing (current assets minus inventory) by current liabilities. A ratio of 1 or higher is considered healthy.

Example: A company has current assets of $1,000,000, inventory of $200,000 and current liabilities of $800,000. The quick ratio would be calculated as: Quick Ratio = (Current Assets - Inventory) / Current Liabilities Quick Ratio = (1,000,000 - 200,000) / 800,000 Quick Ratio = 0.75 This ratio of 0.75 indicates that the company has 0.75 times the amount of current assets minus inventory as current liabilities, which is considered less healthy than a ratio of 1 or higher.

Cash Ratio: 

This ratio measures a company's ability to pay off its short-term obligations using only its cash and cash equivalents. It is calculated by dividing cash and cash equivalents by current liabilities. A ratio of 1 or higher is considered healthy.

Example: A company has cash and cash equivalents of $500,000 and current liabilities of $800,000. The cash ratio would be calculated as: Cash Ratio = Cash and Cash Equivalents / Current Liabilities Cash Ratio = 500,000 / 800,000 Cash Ratio = 0.625 This ratio of 0.625 indicates that the company has 0.625 times the amount of cash and cash equivalents as current liabilities, which is considered less healthy than a ratio of 1 or higher.

Financial Ratios Formulas

 

Financial ratios are used to evaluate a company's financial performance and position. They are calculated using various financial data from a company's financial statements, such as the balance sheet and income statement. Here are some common financial ratios and their formulas:

1. Liquidity Ratios:

• Current Ratio = Current Assets / Current Liabilities
• Quick Ratio = (Current Assets - Inventory) / Current Liabilities

2. Solvency Ratios:

• Debt to Equity Ratio = Total Liabilities / Shareholders' Equity
• Interest Coverage Ratio = EBIT / Interest Expense

3. Profitability Ratios:

• Gross Profit Margin = (Revenue - Cost of Goods Sold) / Revenue
• Net Profit Margin = Net Income / Revenue
• Return on Assets (ROA) = Net Income / Total Assets
• Return on Equity (ROE) = Net Income / Shareholders' Equity

4. Efficiency Ratios:

• Asset Turnover = Revenue / Total Assets
• Inventory Turnover = Cost of Goods Sold / Average Inventory
• Days Sales Outstanding (DSO) = Accounts Receivable / (Revenue / 365 days)

5. Market Ratios:

• Price to Earnings (P/E) Ratio = Market Price per Share / Earnings per Share
• Price to Book (P/B) Ratio = Market Price per Share / Book Value per Share

It is important to note that financial ratios should be compared to industry averages or previous performance to have a better understanding of the company's financial health. Additionally, it is also important to consider the limitations of financial ratios, such as the fact that they are based on historical data and may not be able to predict future performance.