Methods for financial Bench-Marking (e.g. key financial ratios)

To measure company performance we need to understand financial ratios.Determination of these ratios show us our company health.

1.    Profitability Ratios

·      How good a company is at making money?

·      Company’s competitive position in the market.

·      Income statement- Sources of income & Expenses.

Profit Margin = Net Profit / Sales Revenue; Higher is better

2.    Liquidity Ratios

How comfortable a company is to pay its debts in the short term?  

Current Ratio = Current Assets / Current Liabilities; Higher means Lesser Risk and it’s better.

3.    Solvency Ratios

·      How comfortable a company is to pay its long-term debt?

·      Also known as leverage ratio or debt ratios.

·      How much debt is used to finance its assets?

Debt Ratio = Total Liabilities/ Total Assets; Lower debt ratio is better.

4.    Activity Ratios (Efficiency Ratios)

Measures operational efficiency of a company

How well a company manages its working capital & long term assets to produce more?

Also known as efficiency ratios or asset utilization ratios.

Inventory turnover ratio = Cost of Goods sold / Average inventory; Higher means turnaround and it is better.  

5.   Valuation Ratios

Used for investment decisions

What is the right value of company?

EPS (Earning per share) = Net Profit / Number of outstanding shares

P/E Ratio = Price per share (CMV: Current market value)/ Earning per share 

Low P/E means fairly priced and it’s better for investment.