Financial Ratios IDC4U1 – Financial Securities Mr. M. Goldberg, Martingrove C.I. a b = Profit!

Ratio Analysis – Financial Securities (IDC4U1) – Slide 2 of 12 The Current Ratio regarded as a test of liquidity for a company expresses the 'working capital' relationship of current assets available to meet the company's current obligations Total Current Assets Total Current Liabilities

Ratio Analysis – Financial Securities (IDC4U1) – Slide 3 of 12 The Quick Ratio Note: quick assets = total current assets minus inventory Sometimes a company could be carrying heavy inventory as part of its current assets, which might be obsolete or slow moving Thus, eliminating inventory from current assets and then doing the liquidity test is measured by this ratio The ratio is regarded as an key test of liquidity for a company Total Quick Assets Total Current Liabilities

Ratio Analysis – Financial Securities (IDC4U1) – Slide 4 of 12 The Debt to Equity Ratio Measures how the company is managing its debt against the capital of its owners If liabilities exceed the net worth then in that case the creditors have more stake in the business than the shareowners Net Worth is another term for Owners’ Equity Total Liability or Debt Owners’ Equity

Ratio Analysis – Financial Securities (IDC4U1) – Slide 5 of 12 DSO (Day’s Sales Outstanding) Ratio Shows both the average time it takes to turn receivables into cash, and the age, in terms of days, of a company's accounts receivable. Regarded as a test of efficiency for a company. It is the effectiveness with which it converts its receivables into cash. This ratio is of particular importance to creditors and bankers. Total Accounts Receivables Total Revenue () X # Days in Fiscal Period

Ratio Analysis – Financial Securities (IDC4U1) – Slide 6 of 12 The Inventory Turnover Ratio Regarded as a test of Efficiency Indicates the “quickness” with which the company is able to move its merchandise Total Sales Total Inventory

Ratio Analysis – Financial Securities (IDC4U1) – Slide 7 of 12 The Accounts Payable to Sales (%) Ratio Indicates how much of their supplier’s money a company uses in order to fund its sales. A higher ratio means that the company is using its suppliers as a source of cheap financing. The working capital of such companies could be funded by their suppliers. Accounts Payables Annual Sales/Revenue X 100

Ratio Analysis – Financial Securities (IDC4U1) – Slide 8 of 12 The Return on Sales OR Profit Margin (%) Ratio Determines a company’s ability to withstand competition and adverse conditions (like rising costs, falling prices or declining sales in the future) Measures the percentage of profits earned per dollar of sales Indicates how efficiently the company makes money Net Income Revenue X 100

Ratio Analysis – Financial Securities (IDC4U1) – Slide 9 of 12 The Return on Assets Ratio Determines its ability to utilize the assets employed in the company efficiently and effectively to earn a good return (profit) Measures the percentage of profits earned per dollar of asset Indicates how efficiently the company in generates profits on its assets. Net Income Total Assets X 100

Ratio Analysis – Financial Securities (IDC4U1) – Slide 10 of 12 The Return on Equity Ratio Measures the ability of the management of the company to generate adequate returns for the capital invested by the owners of a company Generally a return of 10% would be desirable to provide dividends to owners and have funds for future growth of the company Net Income Owners’ Equity X 100

Ratio Analysis – Financial Securities (IDC4U1) – Slide 11 of 12 Earnings Per Share (EPS) The most important variable in determining a share’s price An indicator of a company’s profitability Net Income – Dividends on Preferred Shares (Average) # Shares Outstanding

Ratio Analysis – Financial Securities (IDC4U1) – Slide 12 of 12 Price/Earnings (P/E) Ratio Represents the multiple of earnings per common share (sometimes called the “multiple”) Shows how much investors are willing to pay per dollar of earnings Stock Price/ Share Earnings per Share (EPS)

Ratio Analysis – Financial Securities (IDC4U1) – Slide 13 of 12 Price/Earnings to Growth (PEG) Ratio An important indicator of a stock’s potential value It’s favoured over the P/E ratio as it accounts for growth A lower PEG means a company’s stock is undervalued Value investors look for a value less than 2 Price/Earnings Ratio Annual Earnings Per Share (EPS) Growth

Ratio Analysis – Financial Securities (IDC4U1) – Slide 14 of 12 Dividend Yield Represents the return or “yield” on share’s dividend, expressed as a percentage and annualized Can be used to spot potential earnings based on company performance Dividend/Share Stock Price/Share