--- Alias: [] Tag: [AtomicNote, #Confidence/🌿Budding] Type: Notes Anki: Yes --- # Strategic Finance Ratios Useful YouTube video:<iframe src="https://www.youtube.com/embed/WJsSgT_on6s" class="resize-vertical"></iframe> ## Finance Ratios ### Gross Profit Margin #Admin/flashcard $Revenue-COGFS = X$ $\frac{X} {Revenue} = gross\,margin$ <!--ID: 1621594207933--> ### Net profit margin/ Return on Sales (ROS) #Admin/flashcard $\frac{Net\,income} {Revenue} = Net\,Profit\,Margin$ $ Revenue - COGS - other\,costs = Y$ $\frac{Y} {Revenue} = net\,profit\,margin/ ROS$ <!--ID: 1621595064522--> - Net income = income after paying for everything else - Some people prefer EBIT (earnings before interest and tax). Depends on role of tax in your strategy assessment ### Return on Assets (ROA) #Admin/flashcard $\frac{Net\,income} {Assets} = ROA$ <!--ID: 1621595064542--> - Remember: Net income = income after paying for everything else - Look at balance sheet ### Return on Equity #Admin/flashcard $\frac{Net\,income} {Equity} = ROE$ - Equity = Money invested in assets/ business, minus debt or liabilities you have to pay. - Note ROE is not return to shareholders - Not the market cap <!--ID: 1621598102398--> ### Return on Invested Capital (ROIC) #Admin/flashcard $\frac{Net\,income - dividend} {Equity + \,'interest\,bearing\,debt'} = ROIC$ - Measures capital invested in the business - Only bother with dividends if you pay them! <!--ID: 1621598102428--> ## Liquidity Ratios ### Current Ratio #Admin/flashcard $\frac{current\,assets} {current\,liabilities} = Current\,Ratio$ - Over 1 = considered solvent <!--ID: 1621598102450--> ### Quick ratio #Admin/flashcard $\frac{current\,assets - inventory} {current\,liabilities} = Quick\,Ratio$ - This is a useful ratio as assets might not be worth as much as on balance sheet- what if cannot be sold at book value? <!--ID: 1621598102471--> ## Activity Ratios ### Inventory Turnover #Admin/flashcard > COGS / inventory $\frac{Cost\,of\,Goods\,for\,Sale} {inventory} = Inventory Turnover$ <!--ID: 1621872017151--> ## Days Sales Outstanding #Admin/flashcard $\frac{accounts\,receivable} {(revenues/365)} = Days\,sales\, outstanding$ - Used to calculate how long to collect payment <!--ID: 1621872017209--> ## Leverage ratios ### Debt to Equity > total liabilities/ equity ### Times Interest Earned > EBIT/ Interest Expense - EBIT can be "operating income" - Whether or not business can cover interest expense ## Shareholder Ratios ### Total Shareholder Returns > (Stock Price (t+1) - Stock price (t) + sum of annual dividends per share) / Stock price (t) Stock price t = stock price at beginning of last year Stock price t+1 = current stock price ### Price to Earnings Ratio > Maket price per share/ earning per share - About optimism on stock market. If too high then stock could be overpriced.