Financial Ratios
They refer to the short-term evolution of the company’s balance sheet, taking into account at least one balance sheet item. These ratios are mainly:
- Leverage
It is the debt of the company, only debt with the cost is usually considered. It is measured as a percentage of total assets or total own resources, which gives an idea of the company’s financing risk. From leverage of 70% on total assets, it can be considered dangerous.
- Debt with cost over total liabilities
It indicates the weight of the debt with cost over total liabilities. Companies such as large stores have high figures for liabilities that have no cost, so a superfluous analysis can lead to confusion.
- Sales working capital
Working capital indicates the short-term position of the company. Payment suspensions are usually caused by problems in this data since despite selling a lot the company does not charge, which causes a liquidity problem. If we measure this situation on sales, it gives us an idea of the efficiency in the use of its assets. A level of 15% – 20% is reasonable.
- Working capital on current assets
It indicates within the short-term asset how much the working capital represents. It shows whether a working capital, expressed in pesetas, is relatively important.
- Rotations
It measures the speed or slowness in the collection/payment of your clients/suppliers, or in liquidating your inventories. This capacity directly affects the management of the aforementioned working capital.
- Acid
It is the ratio that refers to the shortest term of the company since it is left only with the most liquid assets over the total liabilities in the short term.
Income Statement Ratios
They try to get a measure of the profitability of the company. Above all, they are used in income statements estimated for the future, taking those of the past as a basis for comparison. The most important are:
- Cash-Flow over Debt
It represents the part in which the debt could be reduced if hypothetically all the cash flow was used to reduce it.
- Financial expenses
It is the coverage of financial expenses and represents their weight in the company’s business margin. The idea is to know to what extent the income statement is dedicated to paying interest.
- Repayment rate
It is the weight of the allocation for depreciation of fixed assets in the income statement over the fixed assets themselves. High rates mean that the company is forcing amortization.
- Net profit on average own resources
It is the profitability that the shareholder obtains, measured on the book value of these. It must be higher than the opportunity cost that the shareholder has since otherwise, he is losing money.
- Economic Profitability
It indicates the profitability that shareholders obtain on the asset, that is, the efficiency in the use of the asset.
- Operating margin
It is the percentage of sales that represents the margin of the business itself, before the extraordinary financial impact and taxes. It measures the pesetas earned operationally for every 100 pesetas.
- Extraordinary benefits
Indicates the number of extras the company is basing its profits on. If it is close to unity it means that almost everything you get is thanks to the extraordinary, which is negative.
- Net profit on sales
This ratio encompasses the total profitability obtained per peseta sold. It includes all the concepts for which the company obtains income or generates expenses. Very high profitability ratios are very positive; these should be accompanied by an aggressive shareholder remuneration policy.
- Payout
Indicates the percentage of net profit that goes to dividends. High payouts are dangerous due to the limited ability to maneuver in the face of unexpected and negative movements of the funds generated, as well as the limited ability to reduce debt.
- Dividends on cash-flow
Part of the funds generated is used for dividends since the rest is dedicated to investments and debt reduction.
- Stock Ratios
These are the final ratios that are used to compare shares that are trading at different prices.
- EPS (earnings per share)
It is the consolidated net profit after minority interests, divided by the number of adjusted shares. The growth of this ratio is what an investor should focus on the most, above the growth of total profit, since the fact of companies with high growth of the latter can occur but when carrying out expansions they dilute this evolution.
- CPA (cash flow per share)
This ratio refers to funds generated rather than net profit.
- DPA (dividend per share)
Gross dividend per share that a company pays out of a financial year. Adjusted shares are not used, but the dividend per share is announced by the company or estimated by the analyst.
- Stock Market Ratios
Stock market ratios are the instruments used to value listed companies. Stock market ratios usually consist of relationships between the value of the company, sector, or market and a stock market parameter: Profit, cash flow, VTC, NAV, etc. The most used stock market ratios are the following:
- PER (price-earnings ratio)
Indicates the number of times that the price of security contains the EPS. It is measured in time and is a widely used instrument for comparison between listed companies, sectors, or even markets.
- PCF (price cash flow)
Indicates the number of times that the price includes said ratio. In general, it is more correct to use the PCF to compare and value, although in reality the PER is used more.
- Dividend yield
It is the percentage of the price that the dividend per share represents. It can be associated with a guaranteed return at the time of purchase.
- BVP (book value price)
It is the relationship between the price and the book value per share (own resources minus some adjustments). The book value is a minimum in the valuation of the company since the assets are usually worth more than what the accounting books say.
