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. Investing

    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

    Liquidity Measurement Ratios

    Learn about the current ratio, quick ratio, cash ratio and cash conversion cycle.
  3. Investing

    Key Financial Ratios for Retail Companies

    Using the following liquidity, profitability and debt ratios, an investor can gather deeper knowledge of a retail company's short-term and long-term outlook.
  4. Investing

    6 Basic Financial Ratios And What They Reveal

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

    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. Investing

    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.
  7. 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.
  8. Investing

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
Frequently Asked Questions
  1. What's the Best Way to Contact Warren Buffett?

    Learn how to contact Warren Buffett and what kinds of contact is most likely to receive a response from him or from his company, ...
  2. What is the Financial Services Sector?

    A diverse group of companies, beyond banks and credit unions, comprises the financial services sector.
  3. Who are Whole Foods' (WFM) main competitors?

    Whole Foods' main competitors are Sprouts Farmers Markets and Trader Joe's. However, the recent acquisition by Amazon my ...
  4. What caused the Stock Market Crash of 1929 that preceded the Great Depression?

    Find out what led to the stock market crash of 1929, which in turn led to the Great Depression. It sparked a nearly 90% loss ...
Trading Center