Master Financial Ratios & Financial Statements Like a CFO

Learn how liquidity measures a company's ability to convert current assets to cash. Using cash, accounts receivable, and inventory, it covers short-term obligations and informs stability and growth.

Analyze the current ratio, measuring ability to cover short-term liabilities with current assets (cash, bank, debtors, inventory) divided by current liabilities (loans, payables, overdrafts); ideal around 1.5.

Master the quick ratio, or acid test ratio, a more stringent liquidity measure than the current ratio, excluding inventory and prepaid expenses from current assets over current liabilities.

Learn how to calculate gross profit margin by subtracting direct costs from revenue, using Sara's ice cream parlor as a practical example, focusing on cost of goods sold.

Learn how net profit margin measures profitability by dividing net profit by revenue, with a practical example showing a 14% margin from $1,000 in sales and $140 net profit.

Learn how return on equity measures how well a company uses shareholder funds by dividing net profit after tax by shareholders equity, and note debt’s impact on ROE comparisons.

Return on assets measures how efficiently assets generate net profit, using net book values adjusted for depreciation or amortisation and the formula net profit over total assets times 100.

Explore EBITDA, a measure of core operations profitability that excludes non-operational and non-cash items such as interest, taxes, depreciation, and amortization, calculated by adding these back to net profit.

Learn how inventory turnover measures how often a company sells and replaces its inventory, using cost of goods sold divided by average inventory to gauge cash flow and profitability.

Explore the receivable days ratio (days sales outstanding, DSO) to measure how quickly a company collects cash from credit sales, using average receivables over the period and credit terms.

Learn how to calculate the payable days ratio from average accounts payable and cost of sales, and how payment timing affects cash flow and supplier relationships.

Explore how current assets minus current liabilities affects liquidity and operational efficiency. Compute the working capital turnover as net sales divided by average working capital to gauge sales per dollar.

Measure the debt to equity ratio by comparing a company's total debt with its equity to gauge leverage and risk. Calculate it as total liabilities divided by total shareholders' equity.

Assess interest coverage ratio with earnings before interest and taxes divided by interest expense to show how operating profits cover interest payments; above 2-3 signals strength, below 1 signals distress.

Explore how the debt to EBITDA ratio measures a company's ability to repay debt from EBITDA. Understand three and five thresholds and compare with same industries.

Compute the long-term debt to capitalization ratio as long-term debt divided by (long-term debt plus shareholders' equity) to reveal financing mix and leverage.

Earnings per share (EPS) measures the profit per outstanding ordinary share of its common stock after deducting preferred dividends, helping investors assess profitability and growth potential and compare across companies.

Explore how the price-to-earnings ratio values a stock by price per share over earnings per share, with real scenarios, and discuss high versus low P/E pros and cons.

Learn how to calculate the price-to-sales ratio and compare it with the price-to-earnings ratio to assess valuation, growth prospects, and the fact that profitability is ignored.

The price-to-book ratio compares market price per share to book value per share, i.e., net assets, revealing whether a stock is undervalued or overvalued, especially for tangible-asset firms.

Introduces the price to cash flow ratio, using operating cash flow per share to gauge core cash generation. Notes depreciation is added back and limitations include ignoring profitability and debt.

Discover the peg ratio, a valuation metric that adjusts the price-earnings ratio for expected earnings growth over the next five years, helping investors assess fair value relative to growth.

Calculate market cap as share price times outstanding shares to indicate company size and financial health. Consider market cap for risk, growth versus value investing, and acquisitions.

Learn how enterprise value (ev) measures the total cost to acquire a company by calculating market capitalization plus debt minus cash and cash equivalents, with an illustrative example.

Compute the enterprise value to sales ratio, a valuation metric using EV = market cap plus debt minus cash, divided by revenue. Example yields 6.5x EV/Sales.

Learn the EV/EBITDA ratio, a market-valuation metric showing how many times EBITDA you'd pay to acquire a company, calculated as enterprise value divided by EBITDA.

Distinguish cost of sales from expenses and carriage inwards from carriage outwards; compute gross and net profit using opening inventory, purchases, returns, and closing inventory on the profit and loss.

Demystifies the advanced statement of profit and loss, clarifying trailing twelve months data, revenue, gross profit, operating income, net income, earnings per share, and reconciled figures for ratios.

Explore the statement of financial position, formerly the balance sheet, and see how assets, liabilities, and equity form a snapshot balanced by the accounting equation.

Demystify the advanced statement of financial position by dissecting assets, liabilities, and equity, and explain capitalization, common stock equity, capital lease obligations, net tangible assets, working capital, and invested capital.