Once a fundamental analyst decodes a company's financial statements, certain measurement formulas are used to interpret them. Specifically, fundamental analysts determine a company's:

  • Liquidity
  • Risk of bankruptcy
  • Efficient use of assets
  • Profitability
  • Asset coverage and safety of income
  • Earnings per share
  • Competitiveness


Exam Tips and Tricks
You should memorize the following formulas. Not all of them will be on the exam, but some of them certainly will and it is impossible to know which ones you will need:


See the Ratio Analysis tutorial, which discusses everything from where to find data to how to calculate each one:


LIQUIDITY
Working capital Current assets - current liabilities
Current ratio Current assets / current liabilities
Quick ratio (Cash + marketable securities + accounts receivable) / current liabilities
Acid test ratio (Current assets - accounts receivable - inventory) / current liabilities
RISK OF BANKRUPTCY
Debt-to-equity ratio Total debt / total equity
EFFICIENT USE OF ASSETS
Inventory turnover ratio Cost of goods sold / inventory
Cash flow Net profit + depreciation + depletion + amortization
PROFITABILITY
Gross margin EBIT / revenues
Net profit ratio Net profit / revenues
ASSET COVERAGE AND SAFETY OF INCOME
Bond interest coverage EBIT / interest expense
Book value per share Shareholders\' equity/ number of shares
EARNINGS PER SHARE
Earnings per common share (EPS) Net profit / number of common shares outstanding
Fully diluted EPS Net profit / (number of common shares outstanding + number of shares represented by securities convertible into common stock)
Price-earnings ratio Market price of share / EPS
Dividend payout ratio Dividend per share / EPS
Current yield Dividend per share / market price of share
COMPETITIVENESS
Return on common equity (EPS - dividend per preferred share) / market price of common share


Mutual Fund Analysis

Related Articles
  1. Trading

    Ratio Analysis

    Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ...
  2. Investing

    6 Basic Financial Ratios And What They Reveal

    Here's a brief introduction to six financial ratios every investor should be familiar with.
  3. Trading

    4 Investment Ratios That Can Help You Make Money

    You can learn a lot about an investment’s possibilities by reading the corporation’s financial statements. But it also helps to be familiar with some basic investing ratios.
  4. Investing

    5 Basic Financial Ratios And What They Reveal

    Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know.
  5. Markets

    Do Your Investments Have Short-Term Health?

    If a company is strong enough to survive tough times, it is more likely to provide long-term value.
  6. Markets

    4 Ratios to Evaluate Dividend Stocks

    Discover details about fundamental analysis ratios that could help to evaluate dividend paying stocks, and learn how to calculate these ratios.
  7. Markets

    Dynamic Current Ratio: What It Is And How To Use It

    Learn why this ratio may be a good alternative to the current, cash and quick ratios.
  8. Markets

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  9. Investing

    How to Calculate a Coverage Ratio

    In broad terms, the higher the coverage ratio, the better the ability of the enterprise to fulfill its obligations to its lenders.
  10. Markets

    What Are Quick Assets?

    A company’s quick assets can be easily converted into cash.
Trading Center