Financial Ratios to save your life

Understanding a company’s worth first starts with knowing its Profitability, Productivity, and Leverage ratios that allow you to make a call on whether it’s worth going down the path to valuing the company. This can quickly become messy when you start estimating the cash flows because you are making many assumptions based on numbers you pull out of thin air rather than how the company has been performing. In the next couple of months, I will be writing more on this topic and breaking down some companies, along with stories based on what these numbers tell me, then I will walk through how I think of a company’s worth.

*I really created the list for me to find quickly. Will update when I find new measures.

RatioMeasureVariablesWhat it tells u?
Profitability RatioGross MarginGross Profit/ RevenueTells you what are you keeping after you pay for COGS
Profitability RatioOperating MarginOperating income/ RevenueMeasure how much you keep after you pay for SG&A and admin expenses
Profitability RatioProfit MarginNet Profit/ RevenueWhat you keep after you pay for everything
Profitability RatioReturn on Equity (ROE)Net profit/ Shareholder equityReturn to owners
Profitability RatioReturn on Assets (ROA)Net Profit/ Total AssetsHow much profit for every dollar of assets
Profitability RatioEBITDA MarginEBITDA/ RevenueIt try to add back those non cash items and non operating cash. Focus on Finance not accounting
Productivity RatioAsset TurnoverRevenue/ Total AssetsHow effectively am i generating for assets in place to revenue
Productivity RatioInventory TurnoverCogs/ InventoryHigher the number – more the company is getting rid of it.
Productivity RatioInventory Turnover days365/ Inventory turnoverYou want this low – How long i keep it on the shelf before i sell it
Productivity RatioReceivables Collection Period365/ (Sales/ Receivables)After it is off the self, how long to pay.. Lower the number – better your can reserves
LeverageDebt to AssetsTotal debt / total AssetsProportion of assets financed by debt
LeverageDebt to capitalizationDebt/ debt+ Shareholder equityMeasure of leverage by mix of debt and equity
LeverageAssets to shareholder equityAssets/ Shareholder equityControl of assets more than what can be controlled
LeverageInterest coverage RatioEBIT/ Interest expenseability to cover interest from operations

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