@yuusuacademic: THE FINANCIAL RATIO SHEET GUIDE TO ANALYSE BUSINESS PERFORMANCE BY JOEY DE WIT WHY USE RATIOS ✔ Make better financial decisions ✔ Best way to track performance over time ✔ Best way to benchmark and compare results ✓ It's how bankers and investors analyse results THE ULTIMATE RATIO Return on Capital Employed (ROCE) = Operating Profit / (Total Assets - Current Liabilities) ✓ Shows how well the business uses it's capital (equity and debt) to generate operating profits. FINANCIAL PERFORMANCE PROFITABILITY Gross Margin = Gross Profit / Revenue ✓ The profitability of the direct production Operating Margin = EBIT/ Revenue ✓ The profitability of total business operations Net Margin = Net Profit / Revenue ✓ The economic profits that remain after all costs Calculation: Revenue COGS OPEX = EBITDA* Depreciation Amortisation = EBIT EFFICIENCY Working Capital Ratio = Revenue / Work. Cap. How efficiently working capital is turned into sales. Fixed Asset Ratio = Revenue / Fixed Assets ✓ How efficiently fixed assets are turned into sales Cash Conversion Cycle = DIO + DSO-DPO How long it takes to turn purchases into cash EBITDA EXPLAINED EBITDA Earnings Before Interest Taxes Depreciation & Amortisation ✓ Unofficial metric used to calculate earnings and value companies Management Adjustments are allowed to adjust reported EBITDA ! This can be a good or bad thing FINANCIAL POSITION Common EBITDA Adjustments: • One-off income/expenses • Unrealised gains/losses • Asset write-offs • Litigation Expenses - Impairments • Provisions for Bad Debts LIQUIDITY Current Ratio = Current Asset / Current Liability ✓ How easily short-term obligations can be paid Quick Ratio = (C.A. - Inventory) / Current Liability ✓ Whether liquid assets can pay for current liabilities Interest Coverage = EBIT / Interest Expense ✓ How well operating income covers interest WARNING SIGNALS ! High Cash & High Debt = Cash / Debt > 20% ✓ Could indicate fake cash or simply a bad strategy Short-Term Debt to Current Assets = Short-Term Debt / (Receivables + Inventory) > 1.2 ✓ Means ST Debt is used to finance Long-Term assets ! Divergent EBITDA & Operating Cash Flow = (EBITDA - OCF) / EBITDA > 50% ✓ Indicates a high amount of adjustments to EBITDA X JOEYDEWIT_ SOLVENCY Gearing Ratio = Debt / (Debt + Equity) How much of the business is financed by debt Solvency Ratio = (Net Income + Depreciation) / Total Liabilities How well cash covers the liabilities Debt Repayment = EBIT/Total Debt Repayment ✔ How well operating income covers debt repayment UNDERSTANDING STAKEHOLDERS • Management: analyse effectiveness of policies through ROI/ROCE; short to long-term view Shareholders: analyse efficiency and solvency: medium to long-term view • Lenders: analyse liquidity and cash flow;
