Key Financial Ratios in Share Market and its explanations

Articles > Submitted by DynamicInvestor on 11/11/2020 | Views: 76

In this article, I am going to explain the key financial ratios that are tracked for a company. These ratios helps in deciding whether company is having sound financials and it is investment grade stock or not.

Table of Contents

    Debtors Turnover (Days)

    This ratio is used to quantify a Company’s effectiveness in collecting its receivables or money owed by customers. The shows how well a Company uses and manages the credit it extends to customers.

    It is calculated by dividing Revenue from operations by average trade receivables.

     

    Inventory Turnover (Days)

    Inventory Turnover is the number of times a Company sells and replaces it's existing inventory during a period.

    It is calculated by dividing Revenue from operations by average inventory.

    Interest Coverage Ratio

    The Interest Coverage Ratio measures how many times a Company can cover its current interest payment with its available earnings.

    It is calculated by dividing Earnings Before Interest (EBIT - Earnings Before Interest and Taxes) by Interest expenses on borrowings such as bonds, loans, lines of credit, etc..

    Least Ideal Interest Coverage ratio  > 3

    Current Ratio

    The Current Ratio is a liquidity ratio that measures a Company’s ability to pay short-term obligations or those due within one year.

    It is calculated by dividing the current assets by current liabilities.

    Least Ideal Current Ratio > 1.25

    Debt Equity Ratio

    The ratio is used to evaluate a Company’s financial leverage. It is a measure of the degree to which a Company is financing its operations through debt versus wholly owned funds.

    It is calculated by dividing a Company’s total liabilities by its shareholder’s equity

    Least Ideal Debt to Equity Ratio < 0.5

    Operating Profit Margin (%)

    Operating Profit Margin is a profitability or performance ratio used to calculate the percentage of profit a Company produces from its operations.

    It is calculated by dividing the Earnings Before Interest and Taxes (EBIT - Earnings Before Interest and Taxes) by Revenue from operations.

    Net Profit Margin (%)

    The net profit margin is equal to how much net income or profit is generated as a percentage of revenue.

    It is calculated by dividing the profit for the year by Revenue from operations.

    Return on Net Worth (%)

    Return on Net Worth is a measure of profitability of a Company expressed in percentage.

    It is calculated by dividing total comprehensive income for the year by average capital employed during the year. 

     

    Disclaimer: I am not SEBI registered. This post is for educational purpose.

    Website disclaimer: The views, opinions, investment advices (if any) expressed by author on Sharefunda.com are their own and not that of the website or its management. Users are advised to contact certified financial advisor before making investment decisions.

    Submitted by DynamicInvestor on Wednesday, November 11, 2020

    Be dynamic, change your stance based on the situation. This is the mantra of Investing.

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