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Financial Ratios Ebook The Corporate Finance Institute The Analyst Trifecta Financial Ratios eBook For more eBooks please visit: corporatefinanceinstitute.com/resources/ebooks corporatefinanceinstitute.com [email protected] 1 Corporate Finance Institute Financial Ratios Table of Contents Financial Ratio Analysis Overview ............................................................................................... 3 What is Ratio Analysis? .......................................................................................................................................................................................................3 Why use Ratio Analysis? .....................................................................................................................................................................................................3 Types of Ratios? ...................................................................................................................................................................................................................3 Profitability Ratio .......................................................................................................................... 4 Return on Equity .................................................................................................................................................................................................................5 Return on Assets .................................................................................................................................................................................................................6 Return on Capital Employed.............................................................................................................................................................................................7 Gross Margin Ratio .............................................................................................................................................................................................................8 Operating Profit Margin .....................................................................................................................................................................................................9 Net Profit Margin .............................................................................................................................................................................................................. 10 Leverage Ratios ........................................................................................................................... 11 Debt-to-Equity Ratio ........................................................................................................................................................................................................ 12 Equity Ratio ........................................................................................................................................................................................................................ 13 Debt Ratio .......................................................................................................................................................................................................................... 14 Efficiency Ratios .......................................................................................................................... 15 Accounts Receivable Turnover Ratio ........................................................................................................................................................................... 16 Accounts Receivable Days.............................................................................................................................................................................................. 17 Asset Turnover Ratio ....................................................................................................................................................................................................... 18 Inventory Turnover Ratio................................................................................................................................................................................................ 19 Inventory Turnover Days ................................................................................................................................................................................................ 20 Liquidity Ratios ............................................................................................................................ 21 Current Ratio ..................................................................................................................................................................................................................... 22 Quick Ratio......................................................................................................................................................................................................................... 23 Cash Ratio .......................................................................................................................................................................................................................... 24 Defensive Interval Ratio .................................................................................................................................................................................................. 25 Times Interest Earned Ratio .......................................................................................................................................................................................... 26 Times Interest Earned (Cash-Basis) Ratio ................................................................................................................................................................... 27 CAPEX to Operating Cash Ratio .................................................................................................................................................................................... 28 Operating Cash Flow Ratio............................................................................................................................................................................................. 29 Pyramid of Ratios........................................................................................................................ 30 Multiples Valuation Ratios ......................................................................................................... 31 Price-to-Earnings (P/E) Ratio .......................................................................................................................................................................................... 32 EV/EBITDA Ratio ............................................................................................................................................................................................................... 33 EV/EBIT Ratio ..................................................................................................................................................................................................................... 34 EV/Revenue Ratio ............................................................................................................................................................................................................. 35 Valuation Ratios Comparison ........................................................................................................................................................................................ 36 corporatefinanceinstitute.com 2 Corporate Finance Institute Financial Ratios Financial Ratio Analysis Overview What is Ratio Analysis? Corporate finance ratios are quantitative measures that are used to assess businesses. These ratios are used by financial analysts, equity research analysts, investors, and asset managers to evaluate the overall financial health of businesses, with the end goal of making better investment decisions. Corporate finance ratios are also heavily used by financial managers and C-suite officers to get a better understanding of how their businesses are performing. Why use Ratio Analysis? Ratio analysis is a great way to compare two companies that are different in size operations and management style. It also is a great way to quantify how efficient a company’s operations are and how profitable the business is set up to be. Solvency ratios, for example, can be used to analyze how well a company will be able to meet their financial obligations. Types of Ratios? Corporate finance ratios can be broken down into four categories that measure different types of financial metrics for a business: liquidity ratios, operational risk ratios, profitability ratios, and efficiency ratios: corporatefinanceinstitute.com 3 Corporate Finance Institute Financial Ratios Profitability Ratio Profitability ratios are financial metrics used by analysts and investors to measure and evaluate the ability of a company to generate income (profit) 4 relative to revenue, balance sheet assets, operating costs, and shareholders’ equity during a specific period of time. They show how well a company utilizes
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