Business Ratios

Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

Business ratios are used with financial information to compare companies of different sizes within the same industry. The goal is to discover the best investment for return on your stock purchase. Business ratios essentially equalize different size companies within the same industry. A common mistake is to compare two different industries within the same economic sector.

Business ratios are strictly a function of the financial reports audited by Certified Public Accountants. There are five widely accepted categories of financial business ratios. Each category has no less than two different ratios.

1) Liquidity Ratios – measures the relationship between current assets and the corresponding current liabilities.
2) Activity Ratios – are used to compare balance sheet assets against the volume of sales or an income statement value.
3) Leverage Ratios – assist with evaluating the use of debt to capitalize a company.
4) Performance Ratios – designed to reveal income statement performance.
5) Valuation Ratios – market driven information customarily tied to the market share price, it is the only set of business ratios not internally generated.

The ratios accepted as outstanding in one industry are not applicable to a different industry even one within the same sector. Utilizing ratios for comparisons is restricted to comparing companies within the same industry.

Value Investing Episode 1 – Introduction and Membership Program

Business Ratios (Introduction)
Business ratios are used to compare companies of different sizes within the same industry.
Interest Coverage Ratio
The last of the leverage ratios isn’t really a pure leverage indicator but augments the debt ratio. This is the interest coverage ratio.
Gross Profit Margin
The difference between the sales price and the cost of the product or service rendered is known as gross profit margin.
Debt to Equity Ratio
A leverage ratio used to evaluate the financial integrity of a business is the debt to equity ratio. It is strictly a bottom half balance sheet ratio.
Net Profit Margin
The net profit margin reflects the profitability of the company as a percentage of net sales. It is one of the performance ratios used in evaluating business.
Return on Assets
Return on assets is one of the performance ratios used in business identifies the overall ability of management to efficiently utilize resources to generate a profit.
Accounts Payable Turnover Rate (Ratio)
The accounts payable turnover rate is a business activity ratio measuring the frequency of the company’s ability to pay its vendors and suppliers. The numerical value is customarily reported as an annual value. The higher the number, the more often the payables are cleared (paid). A ’12’ would indicate that all payables are paid every month (360 days/12 = ...
Inventory Turnover Rate
One of the many ratios used in business, the inventory turnover rate is often misunderstood, miscalculated and misused.
Fixed Assets To Debt Relationship
Every business owner, especially young entrepreneurs, must understand how long-term debt is used to finance the purchase of fixed assets.
Price to Earnings Ratio – Introduction and Interpretation
Price to Earnings Ratio (P/E) is an analysis tool used to evaluate publicly traded stock.