Portfolio Management - Ratio Analysis
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:
- Risk of bankruptcy
- Efficient use of assets
- Asset coverage and safety of income
- Earnings per share
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:
|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|
|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|
|Return on common equity||(EPS - dividend per preferred share) / market price of common share|
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