Fundamental Ratios Of Stocks
Current Ratio: The Safety Net
Think of the current ratio as your financial safety net. It’s like having an umbrella on a rainy day. This ratio tells you if you have enough short-term assets (like cash or easily convertible assets) to cover your short-term liabilities (bills and debts due within a year).
Personal Anecdote: Imagine you’re planning a road trip. The current ratio is like having enough gas in your car to reach your destination without getting stranded. You want this ratio to be at least 1.0, meaning you have enough cash to cover your bills. Any less, and you might find yourself stuck in a financial downpour.
The current ratio is like your “rainy day fund.” It’s the ratio of a company’s current assets (things they can easily turn into cash) to their current liabilities (debts due soon). If Sarah, who loves her online shopping, has $500 in her bank account and owes $200 on her credit card, her current ratio is 2.5 (500/200). This means she can cover her debts with some cash to spare. Companies aim for a current ratio above 1 to stay financially afloat.
Quick Ratio (Acid-Test Ratio): Cutting Through the Clutter
The quick ratio is like a ninja among liquidity ratios. It’s more conservative than the current ratio because it excludes inventory from your assets. This ratio tells you if you can handle your short-term obligations without waiting to sell your stock.
Personal Anecdote: Let’s say you’re running a lemonade stand. Your quick ratio would be like calculating if you can pay your lemon supplier and cover your stand’s rent without relying on selling your lemonade. It’s all about having cash on hand when you need it.
Think of the quick ratio as your “emergency fund.” It’s similar to the current ratio, but it excludes less liquid assets like inventory. This ratio helps gauge a company’s ability to pay off its immediate debts. Imagine running a lemonade stand. If you have $100 in the bank and owe $20 to your supplier, your quick ratio is 5 (100/20). Companies usually target a quick ratio of at least 1.
Cash Ratio: The Emergency Fund
Imagine the cash ratio as your financial emergency fund. It’s the most conservative of them all because it only considers your actual cash on hand, excluding all other assets.
Personal Anecdote: Think of this ratio as having a jar of cash at home for unexpected expenses. It’s like having a stash for those rainy days when you can’t use your credit card or sell something quickly. A high cash ratio means you’re well-prepared for life’s surprises.
The cash ratio is like your “cash under the mattress.” It’s the strictest measure of liquidity, considering only cash and cash equivalents (like short-term investments). If you’ve got $200 under your mattress and zero debts, your cash ratio is 1. This ratio is about extreme liquidity, and most companies aim for a cash ratio above 0.1 to ensure they have some cash on hand.
Operating Cash Flow Ratio: The Business Lifeline
For all the entrepreneurs out there, this one’s for you. The operating cash flow ratio shows you how well your business can generate cash from its operations. It’s like measuring your company’s ability to breathe and stay alive.
Personal Anecdote: Picture your business as a plant. The operating cash flow ratio is like ensuring your plant has enough roots to absorb water and nutrients. If you want your business to thrive, this ratio should be comfortably above 1.0.
OCF Ratio = Cash flow from core operation / Current liabilities
Now, let’s talk about how much money a company makes from its core operations. Imagine running a lemonade stand again. If you sell $100 worth of lemonade and it costs you $50 to make it, your operating cash flow ratio is 2 (100/50). Companies want this ratio to be greater than 1 to cover their operating costs.
Working Capital Ratio: The Heartbeat of Business
Now, if you’re a business owner or a financial guru, you’re already familiar with this one. The working capital ratio tells you if your business has enough assets to cover its short-term liabilities.
Personal Anecdote: Think of your business as a well-oiled machine. The working capital ratio is like making sure you have enough spare parts to keep it running smoothly. A positive ratio means your business can keep chugging along without any hiccups.
Working Capital Ratio = Current Assets ÷ Current Liabilities
Imagine you have $100 in your wallet, and your monthly bills (like groceries, gas, and Netflix) total $50. Your working capital ratio would be 2:1 ($100 divided by $50), which means you’re in good shape. You have more than enough to cover your bills.
Now, if you only had $30 in your wallet, your ratio would be 0.6:1 ($30 divided by $50). That’s a bit tight, and you might need to dip into your savings or borrow some money to cover your expenses.
In business, it’s the same idea. A high working capital ratio (like your first scenario) is generally good because it means a company has a cushion to handle unexpected costs. But a low ratio (like your second scenario) might indicate financial trouble.
Earning Per Share या EPS kya hai??
अपने नाम की तरह ही Earning Per Share कंपनी के एक शेयर पर उस की कमाई है।
यानी अगर कंपनी के 100 करोड़ शेयर , बाजार में है, तो उसके प्रति शेयर कंपनी कितना पैसा कमाती है।
इसे EPS के नाम से भी जाना जाता है।
EPS से हम यह अनुमान भी लगा सकते है, की हमें अपने निवेश किए गए पैसो पर कितना रिटर्न कितने समय में मिलेगा।
जैसे अगर किसी कंपनी के लिए EPS 5 रुपए है, और वह कंपनी का एक शेयर 25 रुपए का है, तो हम यह अनुमान लगा सकते है, की उस में निवेश पर हमें 20 % सालाना रिटर्न मिल सकता है।
क्युकी जो चीज़ आप 25 रुपए में खरीद रहे है, वह आपको हर साल 5 रुपए कमा के दे सकती है।
इस लिए 5 / 25 = 0.2 x 100 = 20 % सालाना।EPS kya Hai?
मतलब हर पांच साल में आपका पैसा दोगुना हो सकता है।
हा लेकिन एक बात का हमेशा ध्यान रखे की यह EPS कभी भी 100 % निश्चित नहीं रहता।
क्युकी यह कंपनी की कमाई है, जो अलग अलग परिस्थिति में बदलती रहती है।
Types of EPS :
Earning Per Share यानी EPS दो प्रकार के होते है।
1) Basic Earning Per Share (Basic EPS) :
Basic EPS कंपनी का वो EPS है, जिसके लिए हम कंपनी के बाजार में जारी किए गए शेयर की कमाई देखते है।
यानी की जो हम सामान्य EPS निकालते है, वही है Basic EPS .
दूसरा प्रकार है,
2) Diluted Earning Per Share (Diluted EPS) :
कुछ स्थिति में कंपनी के बाजार में शेयर अचानक बढ़ सकते है।EPS kya Hai?
जैसे अगर कंपनी ने अपने Employees को Stock Options दे रखे है, या अगर कंपनी ने कोई Convertible Preference Share Issue किए हो।
या फिर कंपनी ने कोई Convertible Debentures issue किए हो तब ऐसा हो सकता है।
i) Employee Stock Options :
कंपनियां अपने कुछ सीनियर Employees को एक Stock Option देती है।
जिसमे अगर वह Employees चाहे तो कंपनी के शेयर को बाज़ार से बहुत कम दाम पर कंपनी से खरीद सकते है।
जैसे कंपनी ABC का शेयर का दाम 100 रुपए है और उसने अपने कुछ Employees को कुछ साल पहले नए शेयर 50 रुपए में जारी कर के देने का विकल्प दिया था।
और अब अगर Employee चाहे तो कंपनी द्वारा नए शेयर उसे 50 रुपए में मिल सकते है।
जिस से Employees को 100 रुपए के शेयर 50 रुपए में मिल सकते है।
ऐसे में बहुत से Employee इस तरह कंपनी से नए शेयर जारी करवा के खरीद सकते है, और बाजार में बेच सकते है।
अगर ऐसा होता है, तो बाजार में कंपनी के शेयर की संख्या बढ़ जाएगी।
जिस से प्रत्येक शेयर की कमाई कम हो सकती है।
ii) Convertible Preference Share :
हमने शेयर बाजार की जानकारी लेते वक्त जाना था की शेयर मुख्य दो प्रकार के होते है : Equity Share और Preference Shares .
वैसे तो Preference Share , शेयर बाज़ार में नहीं बेच सकते लेकिन अगर वह Preferance Shares Convertible हुए तो उसे निश्चित संख्या के Equity share में बदला जा सकता है।
अगर Preference शेयर धारक उसके Preference Shares को Equity Share में Convert करेंगे तब भी शेयर बाजार में कंपनी के शेयर बढ़ जाएंगे।
इस स्थिति में भी प्रत्येक शेयर की कमाई कम हो सकती है।
iii) Convertible Debentures :
हम इस से पहले Debentures के बारे में जान चुके है।
तब हमने Convertible Debentures की भी बात की थी।
अब अगर किसी कंपनी ने अपने Convertible Debentures जारी किए है, तब निश्चित समय के बाद उनको Equity Share में बदला जा सकता है।
अगर ऐसा होगा तब भी कंपनी के शेयर की संख्या बढ़ जाएगी।
इस से भी प्रत्येक शेयर की कमाई कम हो जाएगी।
अब यह तीनो में से कोई भी विकल्प से कब शेयर की संख्या बढ़ जाएगी यह किसी को पता नहीं होता।
इस लिए कंपनी अपने हर Profit & Loss Statement में Basic EPS के साथ Diluted EPS भी देती है।
Diluted EPS वह EPS है, जो की अगर ऊपर दिए गए कारणों की वजह से कंपनी के शेयर की संख्या बढ़ जाएगी तो प्रत्येक शेयर पर कंपनी की कमाई कितनी होगी वह बताता है।
एक निवेशक के तौर से कंपनी को देखते वक्त हमें Diluted EPS को ही देखना चाहिए।
क्युकी कब शेयर की संख्या बढ़ जाए यह नहीं बताया जा सकता।
अब देखते है की ,
कैसे हम किसी कंपनी का EPS निकाल सकते है ? EPS kya Hai?
वैसे तो हम किसी भी कंपनी के EPS को कंपनी के Total Comprehensive Income में कंपनी द्वारा जारी किए गए शेयर की संख्या का भाग देकर निकाल सकते है।
लेकिन हमें कंपनिया अपने Profit & Loss Statement में Basic और Diluted EPS दोनों ही निकाल कर देती ही है।
Inventory Turnover Ratio: The Sales Dynamo
This ratio measures how efficiently you’re selling your inventory. In simple terms, it tells you how many times you’ve sold and replaced your stock within a given period.
Personal Anecdote: Imagine you own a bookstore. The inventory turnover ratio is like making sure your books don’t gather dust on the shelves. If it’s low, you might want to reevaluate your sales strategy, perhaps by offering promotions or introducing new titles to keep those pages turning.
Think of your pantry at home. If you regularly use up all the canned goods before they expire, you have a high inventory turnover rate. Similarly, this ratio measures how quickly a company sells its inventory. A higher ratio indicates efficient inventory management, while a lower one suggests excess inventory that might tie up cash.
Accounts Receivable Turnover Ratio: Chasing Payments
If you’re a business owner, you’ll relate to this one. The accounts receivable turnover ratio gauges how quickly you’re collecting money from your customers. It’s all about making sure your clients pay up promptly.
Personal Anecdote: Running a freelance graphic design business, you’d want this ratio to be high. It’s akin to ensuring your clients pay their invoices on time. If not, you might find yourself chasing after payments, which can be frustrating and affect your cash flow.
Imagine you lend your friend $100, and they promise to pay you back in a month. If they pay you back in that time, your “accounts receivable turnover” is 1, because you got your money back once in a year.
Now, if you lent that same $100 to another friend, and they paid you back in just a week, your “accounts receivable turnover” is 52 because you got your money back 52 times in a year!
In business, a high accounts receivable turnover ratio is generally good. It means the company is getting paid quickly and can reinvest that money or pay its own bills. But a low ratio might suggest that customers are taking a long time to pay, which could strain the company’s cash flow.
Cash Conversion Cycle: Efficient Operations
This one combines inventory turnover, accounts receivable turnover, and accounts payable turnover to assess how well your business manages cash flow. It’s like fine-tuning the gears in your financial engine for peak efficiency.
Personal Anecdote: Think of your business as a well-choreographed dance performance. The cash conversion cycle is like perfecting your moves so that the money keeps flowing smoothly from purchasing to sales to collecting payments. A shorter cycle means less money tied up in the process and more available for your business’s needs.
This one’s a bit more complex, but stay with me! The cash conversion cycle measures how quickly a company can turn its investments in inventory and accounts receivable into cash. Imagine you’re selling handmade bracelets online. If it takes you 30 days to buy materials, make the bracelets, sell them, and get paid, your cash conversion cycle is 30 days. Companies aim to shorten this cycle to keep cash flowing smoothly.
Debt to Equity Ratio: Balancing Act
Moving away from pure liquidity, this ratio measures the balance between your business’s borrowed money (debt) and the owner’s investment (equity). It’s crucial for understanding your financial stability and risk tolerance.
Personal Anecdote: Consider your business as a see-saw in a playground. The debt to equity ratio is like ensuring that both sides of the see-saw are in balance. Too much debt can tip the scales and make things precarious, while too much equity might mean you’re not leveraging opportunities to grow.
Now, let’s talk about the balance between debt and equity. Imagine you’re buying a house. If you put down a $20,000 down payment (equity) and take out a $180,000 mortgage (debt), your debt to equity ratio is 9 (180,000/20,000). This ratio indicates how much of a company’s funding comes from debt versus equity. Lower ratios are generally safer, indicating a lower reliance on debt.
Debt Ratio: The Leverage Factor
Similar to the debt to equity ratio, the debt ratio focuses on your debt but expresses it as a percentage of your total assets. It reveals how much of your assets are financed by debt.
Personal Anecdote: Imagine your financial portfolio as a pie. The debt ratio is like a slice of that pie. If the slice is too big, it could gobble up all your other slices (assets) and leave you with less financial freedom. It’s about finding a balance that suits your financial goals.
Imagine you’re deciding how much of your income to allocate to paying off debts. The debt ratio for a company is a bit like that. It measures the proportion of a company’s assets financed by debt. If a company has $500,000 in debt and $1,000,000 in total assets, the debt ratio is 0.5 (500,000/1,000,000). This ratio helps assess the risk associated with a company’s debt levels.
Debt Service Coverage Ratio (DSCR): Meeting Your Debt Obligations
For those who have loans or mortgages, the DSCR is vital. It measures your ability to cover your debt payments comfortably, including both principal and interest. This ratio provides peace of mind, ensuring you won’t struggle to make payments.
Personal Anecdote: Think of your debt as a monthly bill, like your rent or mortgage. The DSCR is like checking if your income comfortably covers these payments. If it does, you can sleep soundly knowing your debts won’t overwhelm you.
Imagine you have a car loan with a monthly payment of $300, and your monthly income after taxes is $1,000. Your DSCR would be 3.33 ( $1,000 divided by $300), which means you have more than enough income to cover your car loan.
Now, picture a business with a monthly loan payment of $5,000 and monthly earnings of $6,000. Their DSCR would be 1.2 ( $6,000 divided by $5,000). It shows they have some room to cover the loan, but it’s a bit tighter.
In business, lenders and investors use the DSCR to assess if a company can comfortably meet its debt obligations. A higher DSCR (like your car loan example) suggests a healthier financial situation, while a lower one (like the business example) might indicate potential financial stress.
Earnings Before Interest and Taxes (EBIT) to Interest Coverage Ratio: The Safety Net for Businesses
This ratio is primarily used by businesses to evaluate their ability to cover interest expenses with earnings before interest and taxes. It’s a sign of a company’s financial strength and capacity to meet debt obligations.
Personal Anecdote: If you’re an entrepreneur, think of this ratio as your business’s financial cushion. It’s like having extra savings to cover unexpected business expenses or times when your earnings fluctuate.
Imagine you have a friend who’s borrowed money and has to pay $500 in interest each month. Now, let’s say their monthly earnings before paying any interest or taxes (EBIT) is $2,000. The EBIT to Interest Coverage Ratio would be 4 ($2,000 divided by $500). This means your friend’s earnings are four times higher than their interest expense, which is usually a good sign for lenders and investors.
In business, a higher EBIT to Interest Coverage Ratio is generally seen as healthier because it shows that the company has a comfortable cushion of earnings to meet its interest obligations. On the other hand, a lower ratio might raise concerns about the company’s ability to handle its debt.
Gross Margin Ratio: Profits and Costs
This ratio is particularly important for businesses, but it can also be applied to personal finances. It calculates the percentage of revenue that remains after accounting for the cost of goods sold.
Personal Anecdote: Think of your income as the money you make from your job or investments. The gross margin ratio is like subtracting the costs you incur to earn that money, such as taxes or expenses. This gives you a clear view of your true financial gains.
Imagine you bake and sell cookies. Let’s say it costs you $1 to make each cookie (ingredients, labor, and packaging), and you sell them for $2 each. Your Gross Margin Ratio is 50% ($2 — $1 divided by $2), which means you keep half of the money from each cookie sale as profit after covering the production costs.
In business, this ratio shows the percentage of revenue a company retains after paying for the direct costs associated with producing its goods or services. A higher Gross Margin Ratio suggests better profitability, as the company is keeping more of each dollar earned to cover other expenses and make a profit.
Gross Profit Margin(GPM)
Gross Profit Margin (GPM) is all about understanding how much money you’re making after covering the cost of making your product or providing your service.
Let’s say you made $100 selling lemonade, and it cost you $30 to buy lemons, sugar, and cups. Your GPM would be: GPM% = [($100 — $30) / $100] x 100 = 70% This means you have a 70% Gross Profit Margin. For every dollar you make, you have 70 cents left after paying for your ingredients.
Imagine you have a lemonade stand. You sell lemonade for $2 per cup, and it costs you $0.50 to make each cup (lemons, sugar, cups, etc.). Your GPM would be 75% ($2 — $0.50 divided by $2), which means you keep 75 cents as profit for every dollar in revenue, after covering the cost of making the lemonade.
In business, the Gross Profit Margin shows the percentage of revenue a company retains after accounting for the direct costs associated with producing its goods or services. A higher GPM is generally better, as it indicates that the company is earning more profit for each dollar of revenue, which can help cover other expenses and contribute to overall profitability.
Net Profit Margin(NPM)
takes into account all expenses, including taxes, salaries, and rent. It shows you how much profit you have left after covering all your costs.
Imagine you own a bakery. You’ve already calculated your Gross Profit Margin (GPM) and know that it’s 60%, which means for every $100 you make from selling cakes, you have $60 left after covering the costs of ingredients and baking. But now, you have to consider all the other expenses like rent, employee wages, and electricity. Let’s say these additional expenses total $25. So, your Net Profit is: Net Profit = Gross Profit — Additional Expenses Net Profit = $60 — $25 Net Profit = $35 Now, let’s calculate your Net Profit Margin: NPM% = ($35 / $100) x 100 = 35% Your Net Profit Margin is 35%, meaning you have 35 cents in profit for every dollar you make after all expenses are considered.
Imagine you have a small business. You earned $100,000 in revenue last year, and after paying all your expenses, like rent, salaries, utilities, and taxes, you were left with $20,000 in profit. Your Net Profit Margin would be 20% ($20,000 divided by $100,000), which means you kept 20 cents in profit for every dollar you earned in revenue.
In business, the Net Profit Margin is a critical measure of a company’s overall profitability. A higher NPM indicates that the company is efficient in managing its expenses and is better at turning its revenue into profit. It’s a key indicator for investors and stakeholders to assess a company’s financial health.
Operating Profit Margin(OPM)
It measures how efficiently you’re managing your core operations, excluding interest and taxes.
Let’s say you run a small bookstore. You calculate your Operating Profit Margin to see how well your core operations are performing. Your revenue for the year is $50,000, and after considering all expenses directly related to running the bookstore, like rent, employee salaries, utility bills, and inventory costs, you find that your operating profit is $10,000. Now, let’s calculate your Operating Profit Margin: OPM% = ($10,000 / $50,000) x 100 = 20% This means your Operating Profit Margin is 20%, indicating that for every dollar in revenue, you have 20 cents in operating profit.
Imagine you run a pizza restaurant. You earned $50,000 from selling pizzas, and your total operating expenses, including ingredients, staff wages, and rent, amounted to $30,000. Your Operating Profit Margin would be 40% ($20,000 divided by $50,000), which means you kept 40 cents in profit for every dollar earned from making and selling pizzas.
In business, the OPM is a key indicator of a company’s operational efficiency. It helps assess how well a company is managing its day-to-day costs and generating profit from its core business activities. A higher OPM suggests that a company is running its operations efficiently.
Price-to-Earnings (P/E) Ratio: Assessing Investment Valuation
The P/E ratio is widely used in the world of investing. It measures the relationship between a company’s stock price and its earnings per share (EPS). For investors, it’s a critical tool to evaluate whether a stock is overvalued or undervalued.It helps you understand how much you’re paying for each slice of the company’s profit pie
Personal Anecdote: Imagine you’re shopping for your favorite snacks, and each bag costs a certain amount. The P/E ratio is akin to comparing the price of the snack (stock) to the amount of snack inside (earnings). A lower P/E ratio might mean you’re getting a better deal.
Imagine you’re shopping for a toy, and it costs $10, but it can make you $2 every year in a special game. Your P/E Ratio would be 5 ($10 divided by $2), meaning you’re willing to pay 5 times the annual earnings of that toy to buy it.
In the stock market, the P/E Ratio is used to assess the valuation of a company’s stock. A higher P/E Ratio suggests that investors have high expectations for future earnings growth, and they’re willing to pay a premium for the stock. Conversely, a lower P/E Ratio might indicate that the stock is considered undervalued by investors.
PE Ratio को उदाहरण से समजे:
जैसे अगर किसी कंपनी का PE 15x है, तो हम ऐसा समझ सकते है, की हम हर साल 1 रुपए की कमाई वाले शेयर के लिए 15 रुपए दे रहे है।
यानी हम उस शेयर से 15 साल में 15 रुपए कमा लेंगे और तब हमें हमारे निवेश पर 100 % का रिटर्न मिलेगा।
दुनिया के सबसे सफल निवेशक Warren Buffett का कहना है, की अगर किसी शेयर का PE ratio 15 से ज्यादा है, तो उसे महंगा कह सकते है और अगर उसका PE ratio 15 से कम है, तो उसे सस्ता कह सकते है।
इस लिए हमें वैसे ही शेयर चुनने चाहिए जिनका PE ratio 15 स कम हो। हा लेकिन इसके आलावा भी बहुत चीज़े देखनी पड़ती है। सिर्फ किसी कंपनी के शेयर का PE ratio 15 से निचे होनेसे ही नहीं खरीद सकते। क्युकी अगर कंपनी में कुछ समस्याएँ है, तब भी कंपनी का PE ratio 15 से बहुत निचे जा सकता है। ऐसी कंपनी में निवेश से हमें बचना चाहिए।
Price-to-Sales (P/S) Ratio: A Broader Look at Valuation
Similar to the P/E ratio, the P/S ratio compares a company’s stock price to its revenue per share. It’s often used to assess the attractiveness of stocks, especially in industries where earnings may be less stable.
Personal Anecdote: Think of this ratio as evaluating the price of a pizza (stock) compared to the size of the pizza (revenue). It can help you determine if you’re paying a fair price for the amount of “pizza” you’re getting.
Imagine you’re buying a lemonade stand, and it generates $1,000 in sales each year. The seller asks for $5,000 for the stand. Your P/S Ratio would be 5 ($5,000 divided by $1,000), meaning you’re willing to pay 5 times the annual revenue of the lemonade stand.
In the stock market, the P/S Ratio helps investors assess the value of a company’s stock relative to its sales. A higher P/S Ratio suggests that investors are willing to pay a premium for the stock in anticipation of strong future growth in revenue. A lower P/S Ratio might indicate that the stock is considered undervalued based on its sales.
It’s a bit like evaluating the price of a business compared to its annual income. In the stock market, the P/S Ratio provides a way to gauge whether a stock is attractively priced based on its revenue, which can be particularly useful for companies that are not yet profitable but are still growing their sales.
Price to Sales Ratio क्या है ?
Price to Sales Ratio हमें यह बताता है, की कंपनी की 1 रुपए की Sales पर बाज़ार उसके एक शेयर को कितना दाम दे रहा है।
यह Ratio हमे जो कंपनियां अभी कुछ साल पहले ही शुरू हुई है, और अभी नुकसान में है, उनका मूल्यांकन करने में उपयोगी है।
इस Ratio को कई बार P/S Ratio के नाम से भी जाना जाता है।
अब जानते है की,
Price to Sales Ratio का Formula क्या है ?
किसी भी कंपनी का Price to Sales Ratio निकालने के लिए हमें उसके शेयर के दाम को उसके Annual Sales Per Share निकालना पड़ेगा।
Annual Sales Per Share का मतलब है, कंपनी ने अपने 1 शेयर पर पुरे साल में कितनी Sales की।
उसके बाद हमें कंपनी के Share Price को उसके Annual Sales per Share से विभाजित करना पड़ेगा।
जिस से हमें उस कंपनी का Price to Sales Ratio मिल जाएगा।
इस के अलावा हम सीधा कंपनी के Market Capitalization को उसकी Annual Sales से विभाजित कर के भी P/S Ratio निकाल सकते है।
एक उदाहरण :
कंपनी A जिसने अपने 50 करोड़ शेयर जारी किए है, उसके 1 शेयर का दाम 100 रुपए है।
और पिछले साल उसकी कुल Sales 2500 करोड़ की थी।
Annual Sales per Share = (2500 करोड़ रुपए / 50 करोड़)
= 50 रुपए / शेयर
और उसका Price to Sales Ratio = (100 / 50) = 2 होगा
यानी बाज़ार कंपनी A की 1 रुपए की Sales पर उसके 1 शेयर के 2 रुपए दे रहा है।
अब जानते है की,
उसके उपयोग से कंपनीओ का मूल्यांकन कैसे करे ?
दो समान Industry की कंपनीओ के Price to Sales Ratio की तुलना कर के हम उनका मूल्यांकन कर सकते है।
उदाहरण के तौर पर कंपनी B जो कंपनी A के जैसा ही काम करती है, उसका Price to Sales Ratio 5 है।
यह Ratio कंपनी A के Ratio से ज्यादा है।
यानी बाज़ार कंपनी B के शेयर को कंपनी A के शेयर से ज्यादा दाम दे रहा है।
ऐसे में अगर बाकी सभी स्थिति समान हो तो हम ऐसा कह सकते है, की कंपनी A का दाम सस्ता है।
और कंपनी B का दाम महंगा है।
इस तरह हम किसी भी दो समान व्यापार करने वाली कंपनीओ के इस Ratio की तुलना कर के उनका मूल्यांकन कर सकते है।
कुछ समस्याएँ :
इस Ratio से दो मुख्य समस्याए जुडी है।
1) क़र्ज़ नहीं देखा जाता :
Price to Sales Ratio में सिर्फ कंपनी की Sales को ही देखा जाता है, और कंपनीओ के क़र्ज़ को नहीं देखा जाता।
इस वजह से हो सकता है, की हम जिसे P/S Ratio के आधार पर सस्ती कह रहे है, उस पर ज्यादा P/S Ratio वाली कंपनी से ज्यादा हो।
जैसे हमें P/S Ratio के आधार पर देखा की कंपनी A सस्ती है।
लेकिन अगर ऐसा होता की कंपनी A पर 1000 करोड़ का क़र्ज़ होता और कंपनी B पर सिर्फ 100 करोड़ का होता तो ?
कौनसी कंपनी महंगी और कौनसी सस्ती होती ?
कंपनी B को ज्यादा P/S Ratio होने पर भी सस्ती कहते ना ?
2) Profit Margin भी नहीं देखा जाता :
P/S Ratio में कंपनीओ का Profit Margin भी नहीं देखा जाता यह भी एक समस्या है।
क्युकी जैसे हमने बात की अगर ऊपर की दोनों कंपनीओ में क़र्ज़ समान होता मगर कंपनी A का Profit Margin 15 % और कंपनी B का 40 % होता तो ?
तो हम किस कंपनी को सस्ता और किसको महंगा कहते ?
कंपनी A को महंगा और कंपनी B को ही सस्ता कहते ना ?
इस वजह से सिर्फ P/S Ratio के अनुसार किसी शेयर का मूल्यांकन नहीं करना चाहिए।
Price-to-Book (P/B) Ratio: Assessing Asset Value
The P/B ratio compares a company’s stock price to its book value per share. It’s a handy tool for evaluating whether a stock is trading at a fair value, especially in industries where asset value is significant.
Personal Anecdote: Think of the P/B ratio as checking if you’re paying a reasonable price for a used car compared to its book value. If the price is significantly lower than the book value, you might be getting a good deal.
Imagine you’re buying a used car, and you want to know if it’s a good deal. You find out the car’s current market price is $10,000, but its book value (the value according to the car’s accounting records, considering factors like depreciation) is $8,000. In this case, the P/B Ratio would be 1.25 ($10,000 divided by $8,000), indicating that you’re paying 1.25 times the book value for the car.
In the stock market, the P/B Ratio helps investors determine whether a company’s stock is overvalued or undervalued in relation to its net assets, as recorded in its financial statements. A P/B Ratio above 1 suggests that investors are willing to pay more for the company’s net assets, possibly because they believe in the company’s growth potential. Conversely, a P/B Ratio below 1 may indicate that the stock is trading at a discount compared to its book value.
Think of it as assessing the price of a car compared to its recorded value. In investing, the P/B Ratio can be a valuable tool for evaluating the attractiveness of a stock based on its underlying assets.
Debt-to-Asset Ratio: Balancing Debt and Assets
This ratio evaluates the proportion of your assets financed by debt. It’s valuable for understanding your financial leverage and risk tolerance.
Personal Anecdote: Consider your financial portfolio as a pie, and your debts as one slice of that pie. The debt-to-asset ratio is like assessing how much of your pie is represented by that one slice. A lower ratio suggests less reliance on debt and potentially lower financial risk.
Imagine you want to buy a house. You have $100,000 in savings (your assets), and you decide to take out a mortgage of $80,000 (your debt) to purchase the house. Your Debt-to-Asset Ratio would be 0.8 ($80,000 divided by $100,000), indicating that 80% of your house’s purchase price is financed by debt.
In business, the Debt-to-Asset Ratio provides insight into how a company’s assets are financed. A higher ratio suggests that a larger portion of a company’s assets are funded by debt, which can indicate higher financial risk. Conversely, a lower ratio means that a company relies less on debt to finance its assets, which may be seen as financially healthier.
Price-to-Cash Flow (P/CF) Ratio: Evaluating Cash Efficiency
Similar to the P/E ratio, the P/CF ratio compares a company’s stock price to its cash flow per share. It’s valuable for understanding how efficiently a company converts its cash into profits.
Personal Anecdote: Imagine you’re shopping for a car, and you want to know how efficiently it uses fuel (cash). The P/CF ratio is like assessing the miles per gallon (profit) you get for the price of the car (stock price)
Imagine you’re considering buying a vending machine business. The current market price for the business is $10,000, and it generates $2,000 in cash flow each year (profit plus depreciation, which is a non-cash expense). Your P/CF Ratio would be 5 ($10,000 divided by $2,000), indicating that you’re paying 5 times the annual cash flow generated by the business.
In the stock market, the P/CF Ratio helps investors assess whether a company’s stock is reasonably priced based on its cash flow. A lower P/CF Ratio suggests that you’re getting more cash flow for each dollar you invest in the stock, potentially indicating a better deal. A higher P/CF Ratio might mean you’re paying more for the company’s cash flow.
Inventory Turnover Ratio: Managing Stock Efficiently
This ratio, often used in businesses, indicates how efficiently a company manages its inventory. It calculates how many times inventory is sold and replaced over a period.
Personal Anecdote: Picture a small shop selling handmade crafts. The inventory turnover ratio is like measuring how quickly items are flying off the shelves and getting replaced with new ones. A high ratio suggests effective inventory management.
Imagine you own a toy store. At the beginning of the year, you had $10,000 worth of toys in stock. Over the course of the year, you sold all those toys and replaced them with new ones, and by the end of the year, your inventory was again valued at $10,000. Your Inventory Turnover Ratio would be 1 (total sales of $10,000 divided by average inventory of $10,000), indicating that you’ve sold and replaced your entire inventory once during the year.
In business, a higher Inventory Turnover Ratio generally suggests efficient inventory management. It means the company is selling its goods quickly and doesn’t have a lot of money tied up in unsold products. On the other hand, a lower ratio might indicate that the company is struggling to move its inventory, which could tie up capital and lead to increased storage costs.
Price-to-Earnings Growth (PEG) Ratio: Assessing Growth Potential
The PEG ratio takes the popular Price-to-Earnings (P/E) ratio, which tells you how much investors are willing to pay for each dollar of a company’s earnings. But the PEG ratio adds a twist. It also considers the company’s growth rate.
imagine you’re in the market for a new car. You’ve narrowed it down to two options: Car A and Car B. Car A is a bit cheaper, but it’s been known to have issues down the road. Car B costs a bit more, but it’s got a stellar reputation for reliability and performance. Now, you have to decide which one offers better value for your money, right?
In the stock market, we’re often faced with similar decisions. We want to know if a stock is a good deal, and that’s where the PEG ratio comes in
PEG Ratio = Price-to-Earnings (P/E) Ratio / Earnings Growth Rate
Now, let’s put it all together. If the PEG ratio is less than 1, it suggests that the stock might be undervalued. That’s like finding Car B at a price close to Car A — a great deal! But if the PEG ratio is more than 1, it could mean the stock is overvalued, just like paying a high price for a car that’s known to have problems.
Let’s say you’re looking at two tech companies. Company X has a PEG ratio of 0.8, while Company Y has a PEG ratio of 1.5. Based on the PEG ratio, Company X might be the better buy because it seems to offer more growth for the price you’re paying.
Imagine you’re shopping for two different fruit trees. Tree A costs $100, and it’s expected to produce $10 worth of fruit every year. Tree B costs $200, but it’s expected to produce $20 worth of fruit every year. In this scenario, Tree B is twice as expensive as Tree A, but it’s also expected to produce twice the amount of fruit. So, the PEG Ratio for Tree A would be 10/1 = 10, and for Tree B, it would be 20/2 = 10 as well. Both trees have a PEG Ratio of 10.
In the stock market, the PEG Ratio helps investors assess whether a company’s stock is reasonably priced relative to its earnings growth. It takes the P/E Ratio (price-to-earnings) and divides it by the expected earnings growth rate. A PEG Ratio less than 1 is often considered attractive, suggesting that the stock may be undervalued relative to its growth prospects. A PEG Ratio greater than 1 could indicate that the stock is relatively expensive given its growth outlook.
Interest Coverage Ratio: Debt Safety Net
The interest coverage ratio measures a company’s ability to meet its interest payments on debt with its operating income. It’s vital for assessing financial stability and debt safety.
Personal Anecdote: Think of a company as a trampoline jumper (operating income) trying to reach new heights. The interest coverage ratio is like checking if there’s enough bounce to clear the hurdle (interest payments) safely.
Imagine you have a friend who borrowed $1,000 and has to pay $100 in interest every month. Your friend earns $500 per month. To calculate the Interest Coverage Ratio, you’d divide your friend’s earnings ($500) by the interest payment ($100), resulting in a ratio of 5. This means your friend’s earnings are five times higher than their interest expense.
In business, the Interest Coverage Ratio is a crucial metric that lenders and investors use to evaluate a company’s financial health. A higher ratio, like your friend’s, indicates that the company has a comfortable buffer to cover its interest obligations. Conversely, a lower ratio may suggest that the company could struggle to meet its debt interest payments.
Return on Equity
(ROE meaning in hindi)
Return On Equity किसी भी कंपनी में निवेश पर कितना रिटर्न मिला यह बताती है।
यानि किसी भी कंपनी में Equity यानि निवेशक और मालिक के 1 रुपए के निवेश पर कितना रिटर्न मिला यह जान सकते है।
जिस से हमें यह पता चलता है की हमें उस कंपनी में निवेश करना चाहिए या नहीं। ROE meaning in hindi .
इसे ROE भी कहते है।
क्या है Return on Equity का formula?
Return On Equity का Formula है,
कंपनी की Total Comprehensive Income में उसकी Equity का भाग देने से हमें ROE मिलती है।
Return on Equity को प्रतिशत में दर्शाया जाता है।
Return on Equity कैसे खोजे ?
किसी भी कंपनी का ROE गिनने के लिए हमें उसकी Balance Sheet और पुरे वित्तीय वर्ष का Profit & Loss Statement चाहिए होगा।
यह दोनों ही हम उस कंपनी की वेबसाइट या कोई Stock Exchange में दिए गए उसके Annual Report में से ढूंढ सकते है।
अगर किसी कंपनी में Equity 100 करोड़ है और उसने इस साल 15 करोड़ का मुनाफा कमाया तो उसका
ROE = 15 करोड़ / 100 करोड़ = 0.15 यानि की 15 % होगा। ROE meaning in hindi .
इस तरह हमें किसी भी कंपनी के लिए उसकी ROE (Return on Equity) ढूंढ सकते है।
एक निवेशक के नजरीए से कंपनी का ROE कम से कम 20 – 25 % तो होनी ही चाहिए। क्यूकी 5% से 7% तक रिटर्न तो साधारण बैंक की FD मे भी मिल जाता है। 12 से 15% का रिटर्न किसी Mutual Fund मे निवेश करने पर भी मिल जाएगा।
अब अगर आप सिर्फ एक ही कंपनी मे पूरा पैसा निवेश कर रहे है, तो Mutual Funds से इसमे Risk भी थोड़ा ज्यादा होगा इस लिए कम से कम 20 से 25% ROE होना जरूरी होता है।
अगर इस से कम है, तो उस कंपनी में निवेश करने से अच्छा किसी Mutual Fund में निवेश कर दो।
जितनी ROE ज्यादा उतना ही ज्यादा उस कंपनी में निवेश पर हमें लाभ मिलने की संभावना है।
ज्यादा ROE के साथ हमें उस कंपनी का Debt to Equity Ratio भी देखना पड़ेगा।
किसी भी कंपनी का ROE भी दो तरीके से बढ़ सकता है। ROE meaning in hindi .
पहला ज्यादा क़र्ज़ ले कर और दूसरा बिना ज्यादा क़र्ज़ लिए या Equity के पैसो से।
अगर कंपनी ने ज्यादा क़र्ज़ लिया है, इस लिए उसका ROE ज्यादा है, तो वह बढ़ा हुआ ROE अच्छा नहीं है।
इसके मुकाबले अगर कोई कंपनी में Equity यानि निवेशकों के पैसो से ROE बढ़ रहा है, तो वही बढ़ा हुआ ROE अच्छा है।
इस लिए सिर्फ ROE को ज्यादा देख कर ही निवेश न करे।
कंपनी में क़र्ज़ की स्थिति भी देखे।
Return on Sales क्या होता है ?
किसी भी कंपनी के Return on Sales का मतलब है, की कंपनी द्वारा की गई हर 100 रुपए की Sale पर उसने कितना मुनाफा कमाया।
यह Ratio हमें कंपनी की Profitability बताता है।
मतलब कंपनी सफल तरीके से कितना Profit कमा सकती है।
यह एक तरह से कंपनी की efficiency का अनुमान देता है।
इस वजह से ज्यादातर निवेशक इस ratio का तो उपयोग अलग अलग कंपनीओ के विश्लेषण मे करते ही है।
Return on Sales को कई बार ROS भी कहा जाता है।
अब जानते है की,
ROS का Formula क्या है ?
किसी भी कंपनी के Operating Profit को उसकी Net Sales से विभाजित करने पर हमें उस कंपनी का ROS मिलता है।
ROS को प्रतिशत में दिखाया जाता है।
जैसे Company A की साल 2018 की Net Sales 200 करोड़ और उसका Operating Profit 80 करोड़ है।
ऐसे में उसका ROS ऊपर दिए हुए formula के अनुसार कुछ इस तरह गिना जा सकता है।
ROS = (80 / 200) = 0.40 यानी 40 %.
मतलब कंपनी A ने साल 2018 में हर 100 रुपए की Sale पर 40 रुपए का मुनाफ़ा कमाया।
किसी भी कंपनी के Sales और Operating Profit हमे उसके Profit and Loss Statement में मिल जाएंगे।
इस तरीके से हम किसी भी कंपनी का ROS खोज सकते है।
अब यह जानते है की,
Return on Sales का उपयोग एक निवेशक के लिए क्या है ?
एक निवेशक के लिए ROS बहुत उपयोगी है, क्युकी जैसे हमने बात की ROS हमें कंपनी का Profit Margin बताता है।
इसके जरिए निवेशक एक समान काम करने वाली कंपनीओ के Margin की तुलना कर सकता है, और पता लगा सकता है, की कौनसी कंपनी ज्यादा Margin पर अच्छी Sales कर पा रही है।
ज़्यदातर कंपनियां अपने व्यापार में या तो Margin ज्यादा रख पाती है, या तो Sales ज्यादा कर पाती है।
क्युकी ज्यादा Margin रखने पर उनके द्वारा बेचीं जाने वाली Products महंगी हो जाती है, जिस से लोग उस के बदले किसी और कंपनी से वह Products खरीद लेंगे।
ऐसा होने पर कंपनी की Sales कम हो जाएगी।
लेकिन कुछ कंपनियां ऐसी होती है, जो बाकी कंपनीओ से ज़्यादा Margin भी रख पाती है, और उनकी Sales भी ज्यादा होती है।
इसका कारण होता है की उनके जैसी Products बनाने वाली कोई और कंपनी नहीं होती।
इस लिए वह अपने Products पर अच्छा Margin रख कर भी अच्छी Sales कर लेती है।
ऐसी कंपनियां ज्यादातर वह होती है, जो बहुत सालो से चल रही होती है, और जिनकी Brand लोगो में मशहूर हो गई होती है।
ऐसी कंपनीया निवेश के लिए बहुत अच्छी साबित हो सकती है।
जैसे Apple कंपनी अपनी सभी Products पर बहुत अच्छा Margin भी रखती है, और बहुत अच्छी मात्रा में बेच भी देती है।
ROS के उपयोग से अलग अलग कंपनीओ की तुलना कर के ऐसी ही कंपनीओ को खोज सकते है।
इस लिए एक निवेशक के लिए ROS बहुत उपयोगी है।
Return on Capital Employed (ROCE): Assessing Efficient Capital Utilization
ROCE evaluates how efficiently a company uses its total capital (debt and equity) to generate profits. It’s an essential metric for understanding a company’s financial performance and efficiency.
Personal Anecdote: Imagine you’re running a bakery. ROCE is like measuring how well your bakery uses the mix of borrowed money (loans) and your own money (equity) to bake delicious goods and generate profits.
Imagine you started a small business and invested $10,000 to buy equipment and inventory. Over the year, your business made a profit of $2,000. Your ROCE would be 20% ($2,000 divided by $10,000), indicating that you earned a 20% return on the capital you invested in your business.
In the business world, ROCE is a key financial metric. It reveals how effectively a company is turning its invested capital into profits. A higher ROCE is generally better, as it suggests the company is using its resources efficiently to generate returns. Conversely, a lower ROCE might indicate that the company is not making the most of its capital.
Debt-to-Equity (D/E) Ratio: Balancing Debt and Ownership
The D/E ratio calculates the proportion of a company’s financing that comes from debt compared to equity. It’s a critical indicator of a company’s financial risk and stability.
Personal Anecdote: Think of a company as a seesaw, with one side representing debt and the other representing equity. The D/E ratio is like ensuring that the seesaw is balanced, so neither side overweighs the other, which could lead to instability.
Imagine you’re starting a business. You invest $50,000 of your own money (equity) and borrow $50,000 from a bank (debt) to launch your venture. Your D/E Ratio would be 1:1, indicating that your business has an equal amount of debt and equity financing.
In the business world, the D/E Ratio helps assess a company’s financial structure and risk. A higher D/E Ratio suggests that the company relies more on debt financing, which can increase financial risk but may also provide leverage for growth. A lower D/E Ratio means the company relies more on equity financing, which can be less risky but might limit expansion opportunities.
Operating Profit Percentage: Evaluating Core Business Profitability
This ratio measures the percentage of a company’s revenue that remains as profit after covering operating expenses. It focuses on a company’s core business profitability.
Personal Anecdote: Imagine you own a flower shop. The operating profit percentage is like assessing how much money you make from selling flowers after subtracting the costs of buying and arranging them. A higher percentage suggests a healthier core business.
Imagine you own a bakery, and your bakery’s total revenue (sales from bread, cakes, and pastries) for a year is $100,000. Your total operating expenses (costs for ingredients, labor, rent, and utilities) amount to $70,000. To calculate your Operating Profit Percentage, you would subtract your operating expenses from your total revenue to find your operating profit ($100,000 — $70,000 = $30,000). Then, you’d divide the operating profit by your total revenue to get the percentage, which, in this case, is 30% ($30,000 divided by $100,000).
In the business world, the Operating Profit Percentage is a key indicator of how efficiently a company manages its core operations. A higher percentage suggests that the company is generating a larger profit relative to its revenue, which is generally considered a sign of strong financial health. Conversely, a lower percentage may indicate that the company’s operations are less efficient in generating profit.
Efficiency Ratios: Assessing Operational Efficiency
Efficiency ratios, such as inventory turnover, accounts receivable turnover, and accounts payable turnover, measure how efficiently a company manages its operations, inventory, and receivables.
Personal Anecdote: Consider your life as a well-organized kitchen. Efficiency ratios are like assessing how quickly you use up ingredients (inventory), get paid for your culinary services (receivables), and pay your suppliers (payables) to keep your kitchen running smoothly.
Efficiency ratios are like performance indicators for a company’s operational effectiveness. They help assess how well a company is utilizing its resources to generate revenue and manage its costs. Here are a few common efficiency ratios:
Inventory Turnover Ratio: This ratio measures how quickly a company sells its inventory over a specific period. A high inventory turnover suggests efficient inventory management.
Accounts Receivable Turnover Ratio: It evaluates how quickly a company collects payments from its customers. A higher ratio implies effective credit and collection practices.
Accounts Payable Turnover Ratio: This ratio assesses how long it takes a company to pay its suppliers. A higher ratio may indicate good vendor relationships and efficient payment processes.
Asset Turnover Ratio: It gauges how effectively a company uses its assets to generate sales revenue. A higher ratio indicates efficient asset utilization.
Working Capital Ratio: This ratio measures a company’s ability to cover its short-term liabilities with its current assets. A higher ratio suggests better liquidity and efficient working capital management.
Cash Conversion Cycle: It evaluates the time it takes for a company to convert its investments in inventory and other resources into cash flows from sales. A shorter cash conversion cycle is often a sign of efficiency.
These efficiency ratios help businesses and investors understand how well a company is operating in various aspects of its operations. Analyzing these ratios can uncover areas where improvements are needed or highlight strengths in a company’s business model.
Free Cash Flow Ratio:
The free cash flow ratio measures a company’s ability to generate cash after covering its operating expenses and investments in assets. It’s like calculating how much money you have left after paying your rent, groceries, and savings. If you have $500 left after all that, and you make $1,000, your free cash flow ratio is 0.5 (500/1,000). A positive ratio means the company is generating cash for growth or paying down debt.
Imagine you have a lemonade stand business. In a year, you earned $10,000 in revenue from selling lemonade. After accounting for the cost of lemons, sugar, cups, and your lemonade stand (your operating expenses), you have $6,000 left. You also spent $2,000 to upgrade your lemonade stand (CAPEX). Your FCF would be $4,000 ($6,000 — $2,000).
In business, the Free Cash Flow Ratio is calculated by dividing FCF by a company’s revenue. For example, if your lemonade stand’s FCF is $4,000, and your total revenue is $10,000, your FCF Ratio would be 40% ($4,000 divided by $10,000).
The FCF Ratio is a valuable measure because it reflects the cash a company has available for activities like paying dividends, reducing debt, investing in growth, or weathering economic downturns. A higher FCF Ratio generally indicates a company is generating more cash relative to its revenue, which can be a sign of financial strength and flexibility.
Defensive Interval Ratio:
Picture this: You’re on a deserted island, and you need to ration your supplies to survive until rescue. The defensive interval ratio is a bit like that. It calculates how long a company can sustain its current operations without any additional cash inflow. This helps investors gauge the company’s ability to weather unexpected financial storms.
The Defensive Interval Ratio is like a financial safety gauge for a company, especially during challenging times. It measures how long a company’s liquid assets (typically cash and short-term investments) can cover its operating expenses if it suddenly stops generating revenue.
Imagine you’re going on a road trip, and you want to make sure you have enough money for gas, food, and accommodations along the way. You have $1,000 in cash and plan to spend $100 per day. Your Defensive Interval Ratio would be 10 days ($1,000 divided by $100), meaning you have enough money to cover your expenses for 10 days without any additional income.
In the business world, the Defensive Interval Ratio is calculated by dividing a company’s liquid assets by its average daily operating expenses. For example, if a company has $1 million in cash and its average daily operating expenses are $10,000, its Defensive Interval Ratio would be 100 days ($1,000,000 divided by $10,000).
Receivables Turnover Ratio:
Imagine you lend money to your friends, and you want to know how quickly they pay you back. The receivables turnover ratio is like that. It measures how efficiently a company collects on its accounts receivable (money owed by customers). A higher ratio suggests quicker collection, which is good for cash flow.
The Receivables Turnover Ratio is like a speedometer for a company’s ability to collect payments from its customers efficiently. It measures how quickly a company’s accounts receivable (money owed by customers) are converted into cash during a specific period.
Imagine you have a small business that sells computer software. Over the course of a year, you invoice your customers a total of $100,000 for software licenses. At the end of the year, your accounts receivable (unpaid invoices) amount to $20,000. Your Receivables Turnover Ratio would be 5 times ($100,000 in total sales divided by $20,000 in accounts receivable), indicating that you collected payments, on average, 5 times during the year.
In the business world, the Receivables Turnover Ratio is a valuable metric to assess how efficiently a company manages its credit policies and collects outstanding payments. A higher ratio suggests that the company is collecting payments quickly, which is often seen as a sign of effective credit and collection practices.
Cash Burn Rate:
Picture this as your savings account balance decreasing over time. The cash burn rate measures how quickly a company is using up its cash reserves. If a company starts the year with $1 million in cash and ends with $800,000, its cash burn rate for the year is $200,000. This ratio is essential for startups and high-growth companies to manage their runway.
Cash burn rate is like a financial speedometer that tells you how quickly a company is using up its available cash reserves or how fast it’s “burning” through its cash. It’s typically used by startups and businesses to gauge their sustainability and financial runway.
Imagine you’re driving a car, and your fuel gauge shows that you have 100 miles of fuel left in your tank. If you’re driving at a rate of 20 miles per hour, your “cash burn rate” would be 5 hours (100 miles divided by 20 miles per hour). This means you can drive for 5 more hours before running out of fuel.
In the business context, cash burn rate is calculated by dividing a company’s current cash balance by the rate at which it is spending or “burning” cash each month. For instance, if a startup has $100,000 in cash and is spending $10,000 per month on operating expenses, its cash burn rate is 10 months ($100,000 divided by $10,000). This means the company can continue operating for 10 more months at its current spending rate before running out of cash.
Cash burn rate is a crucial metric for startups and businesses, as it helps them plan for their financial future and secure additional funding if needed. It’s like knowing how much fuel you have left in your car’s tank, allowing you to make informed decisions about when to refuel or seek additional resources to sustain your journey.
Debt to EBITDA Ratio:
Imagine you’re comparing your friend’s monthly rent to their monthly income. The debt to EBITDA ratio assesses a company’s ability to manage its debt in relation to its earnings before interest, taxes, depreciation, and amortization (EBITDA). It’s a valuable measure for evaluating a company’s debt burden and its capacity to repay.
Imagine you have a small business. Your business has total debt, including loans and bonds, amounting to $100,000. In a year, your business generates $50,000 in EBITDA. Your Debt to EBITDA Ratio would be 2 ($100,000 in debt divided by $50,000 in EBITDA), indicating that it would take your business 2 years of EBITDA to repay its debt fully.
In the business world, the Debt to EBITDA Ratio is a critical financial metric. A lower ratio is often preferred because it suggests that the company can repay its debt more quickly using its earnings. Conversely, a higher ratio may indicate that the company has a larger debt burden relative to its earnings, which could raise concerns about its financial stability.
Profit Margin: Assessing Profitability
Profit margin measures the percentage of profit a company makes for each dollar of revenue. It provides insights into a company’s overall profitability.
Personal Anecdote: If you’re considering investing in a business, the profit margin is like evaluating how much profit the business generates for each dollar of sales. A higher profit margin suggests a more profitable venture.
Imagine you have a lemonade stand. In a day, you earn $100 from selling lemonade. However, you also spend $40 on lemons, sugar, cups, and labor. After deducting these expenses from your revenue ($100 — $40), you have $60 in profit. Your Profit Margin would be 60% ($60 in profit divided by $100 in revenue).
In the business world, Profit Margin is expressed as a percentage and helps evaluate a company’s profitability. A higher Profit Margin indicates that a company is efficient in controlling its costs and retaining a larger percentage of its revenue as profit.
Imagine you’re building a sandcastle on the beach. The equity ratio is akin to the amount of sand you personally brought to build that castle versus the total amount of sand used. It’s a measure of how much of a company’s assets belong to the owners (shareholders’ equity) compared to the total assets. A higher equity ratio signifies a greater ownership stake and financial stability.
Imagine you have a small business, and the total value of your assets (like equipment and cash) is $100,000. Out of this, $60,000 comes from your own investments and retained earnings (equity), and the remaining $40,000 is borrowed from a bank or other lenders (debt). Your Equity Ratio would be 60% ($60,000 in equity divided by $100,000 in total assets), indicating that 60% of your business’s assets are financed by equity.
In the business world, the Equity Ratio helps assess a company’s financial structure and risk. A higher Equity Ratio generally suggests that the company relies less on debt financing, which can be seen as financially healthier and less risky. Conversely, a lower Equity Ratio means the company relies more on debt, which can increase financial risk.
Let’s start with something fundamental — earnings yield. This is like a stock’s version of a return on investment. It’s the annual earnings per share divided by the stock price. In simple terms, it tells you how much profit you’re making relative to the price you paid for the stock. The higher, the better!
Personal Anecdote: Imagine you buy a company’s stock for $100, and it earns you $10 annually. Your earnings yield would be 10%. Not too shabby, right?
Imagine you’re considering buying shares of a company’s stock. The company’s earnings per share (EPS) are $5, and the current market price of one share is $100. To calculate the Earnings Yield, you’d divide the EPS by the stock price ($5 divided by $100), which gives you an Earnings Yield of 5%.
In essence, Earnings Yield tells you how much profit you would earn for each dollar you invest in the stock. A higher Earnings Yield is generally considered better because it indicates that you’re getting more earnings for your investment.
Market cap is like the popularity contest of the stock market. It’s the total value of all outstanding shares of a company’s stock. Large-cap stocks are like the popular kids, while small-cap stocks are like the underdogs.
Personal Anecdote: Think of it as a high school cafeteria — the market cap determines where a stock sits in the social hierarchy.
Imagine you have a company called ABC Inc., and its stock is currently trading at $50 per share. If there are 1 million shares of ABC Inc. stock in circulation, then the Market Cap of ABC Inc. is $50 million ($50 per share multiplied by 1 million shares).
Market Cap is used to categorize companies into different size groups. Here are the common categories:
- Large Cap: Companies with a Market Cap typically greater than $10 billion.
- Mid Cap: Companies with a Market Cap between $2 billion and $10 billion.
- Small Cap: Companies with a Market Cap between $300 million and $2 billion.
- Micro Cap: Companies with a Market Cap less than $300 million.
Book value is the net worth of a company’s assets minus its liabilities. In essence, it’s what the company would be worth if it sold everything and paid off all its debts.
Personal Anecdote: Imagine your favorite bookstore — their book value is like the sum of all the books they own after subtracting any debts.
Imagine you own a small business. You have $100,000 worth of assets, such as equipment and inventory. However, you also have $40,000 in debts and obligations, like loans and unpaid bills. Your Book Value would be $60,000 ($100,000 in assets minus $40,000 in liabilities), indicating that this is the estimated value of your business according to your balance sheet.
In the business world, Book Value is calculated for each share of a company’s stock by subtracting its total liabilities from its total assets and then dividing by the number of outstanding shares. This provides the Book Value per share, which can be compared to the current market price of the stock.
Credit ratings are like report cards for companies. They tell you how risky it is to lend them money or invest in their stock. Higher ratings mean lower risk.
Personal Anecdote: Think of it as choosing a study partner — you’d probably pick the one with the best grades!
Imagine you’re a bank considering whether to lend money to someone. You look at their credit report, and it shows a score of 750 out of 850. This high credit score indicates that the person has a strong history of repaying loans and is likely to be a reliable borrower. So, you’re more inclined to approve their loan.
In the financial world, credit ratings are assigned by credit rating agencies like Moody’s, Standard & Poor’s, and Fitch. They evaluate the creditworthiness of entities (individuals, corporations, or governments) and assign ratings that reflect their assessment. These ratings often consist of letter grades or symbols, with higher ratings indicating a lower risk of default.
For example, a government with a AAA rating is considered to have the highest creditworthiness and is seen as very likely to repay its debts. Conversely, a company with a lower rating, like B or CCC, may be seen as having a higher risk of default.
Credit ratings are crucial because they influence the interest rates at which entities can borrow money. Higher-rated entities can typically access loans at lower interest rates, while lower-rated entities may face higher borrowing costs.
Investors, lenders, and creditors use credit ratings to make informed decisions about lending money, investing in bonds, or extending credit. It’s like consulting a report card to determine someone’s financial responsibility and reliability before making a financial decision.
Think of a company as a pie — the enterprise value is the total cost to buy the entire pie, including the slices already claimed by debt holders. It gives you a more comprehensive view of a company’s value.
Personal Anecdote: Imagine you’re buying a pizza joint; you’d consider not just the price tag but also the debts left by the previous owner.
Imagine you’re considering buying a small business. You’d need to account for not only the purchase price but also any outstanding loans or debts the business has, as well as its cash reserves. Enterprise Value combines all of these elements to provide a more complete picture of the business’s value.
In the business world, Enterprise Value is calculated by adding a company’s market capitalization (the value of its outstanding shares) to its total debt, then subtracting its cash and cash equivalents. The formula is:
Enterprise Value = Market Capitalization + Total Debt — Cash and Cash Equivalents
This figure helps investors, analysts, and potential acquirers assess a company’s total worth, including its financial structure. It’s often used in financial analysis to compare the relative value of different companies and to assess whether a company might be undervalued or overvalued in the market.
आपके किसी दोस्त ने 2 साल पहले 25 लाख में एक घर ख़रीदा था।
जिसमे से 15 लाख रुपए उसने खुद चुकाए थे और बाकि के 10 लाख के लिए उसने बैंक से क़र्ज़ लिया था।
उसमे से 2 लाख रुपए उसने चुका दिए थे।
यानी अब उस घर पर सिर्फ 8 लाख रुपए का क़र्ज़ है।
अब उसकी वित्तीय स्थिति बुरी हो जाने के कारण वह आपके पास आता है, और आपको उसका घर खरीदने के लिए कहता है।
अब उस घर को वह आपको 18 लाख में बेचता है।
जिस से आप उस की जगह पर उस घर के मालिक बन जाते है।
लेकिन उस घर पर अभी भी 8 लाख रुपए का क़र्ज़ बाकि है, जो आपको चुकाना है।
तभी आप उस घर के पूरी तरह से मालिक बन सकते है।
यानि आपको वह घर की पूरी कीमत 18 लाख और 8 लाख मिलकर पुरे 26 लाख चुकानी पड़ेगी।
उसमे से 18 लाख रुपए आपने अपने दोस्त को दिए इस लिए वह 18 लाख रुपए उस घर की Equity Value होगी।
और पुरे 26 लाख रुपए उस घर की Enterprise Value होगी।
इसी तरह किसी भी कंपनी के लिए भी Equity Value और Enterprise Value होती है।
कंपनी का Market Capitalization कंपनी की Equity Value है।
जबकि कंपनी की EV हमें खोजनी पड़ती है।
Enterprise Value Formula :
कंपनी की EV खोजने के लिए :
1) कंपनी का Market Capitalization खोजे।
Market Capitalization आप उस कंपनी के 1 शेयर की कीमत को कंपनी के Total Number of Share से Multiply कर के खोज सकते है।
2) अब उस कंपनी की Balance Sheet में से उसकी Short Term Debt, Long Term Debt और Cash & Cash Equivalent पता करे।
3) Market Capitalization में Short Term और Long Term Debt जोड़ दे।
4) फिर उसमे से Cash & Cash Equivalent को घटा दे।
अब जो कीमत मिलेगी वही होगी उस कंपनी की EV.
उदहारण के तौर पर कंपनी ABC के लिए :
|Total Number of Shares||10 करोड़|
|Share Price||100 रुपए|
|Short Term Debt||20 करोड़|
|Long Term Debt||70 करोड़|
|Cash & Cash Equivalent||10 करोड़|
उसके लिए Market Capitalization = 10 करोड़ x 100 रुपए = 1000 करोड़ रुपए
Enterprise Value = Market Capitalization + Short Term Debt + Long Term Debt – Cash & Cash Equivalent
Enterprise Value = 1000 करोड़ + 20 करोड़ + 70 करोड़ – 10 करोड़ = 1080 करोड़
इस तरह आप किसी भी कंपनी की Enterprise Value खोज सकते है।
सिर्फ Market Capitalization के बदले EV को ध्यान में लेने से कंपनी की Debt कि स्थिति भी पता चलती है।
क्युकी कुछ ऐसी Industries है, जहा पर Debt ज्यादा ही होती है, जैसे Power Generation और Steel Industry .
इस लिए हमें EV के अनुसार किसी समान Industry की कंपनीओ की ही तुलना करे।
Debtor days tell you how long it takes for a company to collect payments from customers. It’s like measuring the speed at which people pay their bills.
Personal Anecdote: Picture being a landlord waiting for rent — the fewer days it takes for tenants to pay, the better your cash flow.
Imagine you run a small business. In a month, you make $10,000 in sales to various customers on credit. However, it takes an average of 30 days for your customers to pay their invoices. Your Debtor Days, or DSO, would be 30 days, indicating that it takes a month for you to collect payment from your customers on average.
In the business world, Debtor Days are calculated by dividing the total accounts receivable (unpaid invoices) by the average daily sales. For instance, if a company has $60,000 in accounts receivable and its average daily sales are $2,000, its Debtor Days would be 30 days ($60,000 divided by $2,000).
Debtor Days are an essential metric for assessing a company’s cash flow and the efficiency of its credit and collection processes. A shorter Debtor Days figure suggests that a company is collecting payments more quickly, which can improve cash flow and working capital management.
Financial leverage is a bit like using a magnifying glass. It amplifies both gains and losses. When a company uses borrowed money (debt) to finance its operations, it’s leveraging. This can boost profits if things go well, but it also means higher risks if they don’t.
Personal Anecdote: It’s like investing in a rollercoaster — it can be thrilling on the way up but stomach-churning on the way down.
Imagine you want to buy a house worth $500,000. You have $100,000 of your own money to put down as a down payment, and you borrow the remaining $400,000 from a bank. If the value of the house increases by 10% to $550,000, your gain is $50,000. However, since you only invested $100,000 of your own money, your return on investment is much higher (50%) compared to the house’s price increase.
In the business world, Financial Leverage is a strategy where a company uses debt (like loans or bonds) to finance its operations and investments. By doing so, it aims to amplify returns for its shareholders. If the returns on investments exceed the cost of debt, shareholders can benefit from the additional profits generated by using borrowed money.
However, financial leverage also increases risk. If the returns on investments fall short of the cost of debt, it can lead to financial distress and increased financial risk.
The Piotroski Score is like a report card for a company’s financial health. It looks at several factors to determine if a company is getting stronger or weaker. A high score suggests strength and improvement.
Personal Anecdote: Think of it as assessing your own life — Are you saving more, spending less, and achieving your goals? A high Piotroski Score means the company is doing just that.
Imagine you’re a teacher grading a student’s performance in various subjects. The Piotroski Score evaluates a company based on nine financial criteria, each of which earns a point if the company meets specific criteria related to its profitability, liquidity, and financial stability. The scores are then added up to create an overall score.
The nine criteria typically include items like positive net income, positive operating cash flow, improving profitability, and a reduction in financial leverage (reduction in debt). A higher Piotroski Score indicates that a company meets more of these criteria and is considered to have stronger financial fundamentals.
G Factor (Growth Factor):
The G Factor is all about growth. It measures how fast a company is expanding its earnings, revenue, or other important metrics. High G Factors can indicate exciting potential.
Personal Anecdote: It’s like tracking the height of your younger sibling — you can see how fast they’re growing and predict if they’ll be taller than you one day.
Working Capital Days:
Working capital days measure how quickly a company can turn its current assets (like cash and inventory) into cash. A shorter working capital cycle is often seen as more efficient.
Personal Anecdote: Imagine you’re flipping items on an online marketplace — the faster you buy and sell, the quicker you make money.
The Graham Number is like a bargain-hunter’s secret weapon. It helps you determine if a stock is undervalued by comparing its price to its intrinsic value.
Personal Anecdote: It’s akin to finding a vintage comic book at a garage sale — if it’s priced lower than its real worth, you’re in for a great deal!
Public and Institutional Holdings:
These terms refer to who owns a company’s stock. Public holdings are owned by individual investors like you and me. Institutional holdings are owned by big players like mutual funds and pension funds.
Personal Anecdote: Think of it as a pie chart — the size of each slice represents how much of the company is owned by the public, institutions, or insiders.
Change in Ownership:
Changes in ownership, such as FII (Foreign Institutional Investors) and DII (Domestic Institutional Investors) holdings, indicate shifts in investor sentiment. If institutions are buying or selling, it can impact the stock’s price.
Personal Anecdote: Imagine your favorite restaurant — if new chefs take over, it might change the menu and the dining experience.
Export percentage is the proportion of a company’s products or services sold in international markets. A higher export percentage can indicate global demand for the company’s offerings.
Personal Anecdote: It’s like having a lemonade stand known for its unique flavors — the more people from different neighborhoods come to taste, the better!
Unpledged Promoter Holding:
Promoters are the people who started a company. Unpledged promoter holding refers to the portion of their shares in the company that is not pledged as collateral for loans. It reflects their confidence in the company’s prospects.
Personal Anecdote: Think of it as the founders of a successful family bakery who choose not to sell a part of their secret recipe — they believe in their product.
Industry PE and PBV:
Industry PE (Price-to-Earnings) and PBV (Price-to-Book Value) ratios are essential for comparing a company to its industry peers. It helps you gauge if a stock is overvalued or undervalued within its sector.
Personal Anecdote: Picture you’re at a bake-off competition, and you’re judging a cake based on how it compares to other cakes of the same type — is it worth the price?
Change in FII and DII Holdings:
Changes in Foreign Institutional Investors (FII) and Domestic Institutional Investors (DII) holdings can be significant market indicators. If these big players are increasing or decreasing their stakes in a company, it can influence stock prices.
Personal Anecdote: It’s like observing which big players are attending a basketball game — their presence or absence can affect the team’s performance.
Price to Sales:
Let’s start with “Price to Sales.” Imagine you’re at a garage sale. If you spend $10 to buy a widget and the seller’s total sales for the day are $100, your price-to-sales ratio is 10%. For stocks, this ratio helps you gauge if the stock is overvalued or undervalued based on its sales.
Personal Anecdote: Think of it as deciding whether that vintage vinyl record you just bought at the garage sale is worth the price based on how much the seller made that day.
Your “Net Worth” is your financial superhero cape! It’s the value of everything you own (assets) minus what you owe (liabilities). A positive net worth means you have more assets than debts.
Personal Anecdote: Just like knowing your superhero gadgets’ total worth, it’s crucial to understand your financial situation.
“Intrinsic Value” is the magic number that tells you what a stock is really worth. It considers the company’s financial health and future growth potential.
Personal Anecdote: Think of it as buying a vintage comic book at its actual value, not the inflated price someone is asking for at a convention.
Altman Z Score:
The “Altman Z Score” is like a health check for companies. It predicts their financial stability. A higher score indicates lower bankruptcy risk.
Personal Anecdote: It’s similar to getting your annual check-up to ensure you’re in good health.
Debt to Profit:
“Debt to Profit” shows how much debt a company has in relation to its earnings. A high ratio might indicate financial risk.
Personal Anecdote: Think of it as comparing your student loans to your yearly income — too much debt relative to your earnings can be a red flag.
Total Capital Employed:
“Total Capital Employed” is like the total cost of setting up your lemonade stand, including the lemon juicer and your initial lemon supply. It helps you understand how efficiently a company uses its resources.
Personal Anecdote: Just like your lemonade stand, a business should use its invested capital wisely to generate profits.
52w Index and Up/Down from 52w High or Low:
The “52w Index” tracks a stock’s performance over the past year. “Up from 52w Low” and “Down from 52w High” help you see if a stock is currently on the rise or facing a dip.
Personal Anecdote: It’s like checking the weather forecast to see if it’s a good day for a picnic or if you should stay indoors.
Market Cap to Quarterly Profit:
“Market Cap to Quarterly Profit” gives you a quick idea of how much a company is worth relative to its recent earnings.
Personal Anecdote: It’s similar to calculating how much your lemonade stand is worth compared to the money you made in the last three months.
“Debt Capacity” is like determining how much of a mortgage you can afford. It indicates how much debt a company can reasonably take on without straining its financial health.
Personal Anecdote: Think of it as figuring out how big a home loan you can comfortably manage while still having enough to cover your daily expenses.
Market Cap to Debt Cap:
“Market Cap to Debt Cap” compares a company’s market value to its total debt. It gives you a sense of how much risk a company carries due to its debt load.
Personal Anecdote: It’s akin to assessing how much of your total net worth is tied up in mortgage debt versus your other assets.
RATIOS WITH STORY
Imagine you have a friend named Alex. Alex is a savvy entrepreneur who loves to bake delicious cupcakes and sell them at the local farmers’ market. Let’s follow Alex’s journey as we explore these financial ratios.
Current Ratio: Think of this as the number of cupcakes Alex has in stock right now. It’s like checking if Alex has enough cupcakes (current assets) to cover any unexpected expenses (current liabilities). You’d want this to be higher to ensure Alex can handle unforeseen costs.
Quick Ratio: This is like the current ratio but without counting cupcakes that are still baking in the oven. It’s a more conservative measure of Alex’s ability to cover immediate bills.
Cash Ratio: Now, this is just the cash Alex has in the register. It’s like the money in the jar at the farmers’ market. A higher cash ratio means Alex has more immediate spending power.
Operating Cash Flow Ratio: Imagine this as the percentage of money Alex makes from selling cupcakes after covering all expenses. A higher ratio means Alex’s cupcake business is bringing in more dough.
Working Capital Ratio: This tells us if Alex has enough resources (like flour, eggs, and frosting) to keep the cupcake business running smoothly. A positive working capital ratio is like having all the ingredients in the pantry.
Inventory Turnover Ratio: This ratio shows how quickly Alex sells cupcakes. A high turnover means fresh cupcakes are flying off the shelves, which is great for business.
Accounts Receivable Turnover Ratio: If someone owes Alex money for cupcakes, this ratio helps us see how quickly they’re paying up. Faster payments mean more cash in hand.
Cash Conversion Cycle: This tells us how long it takes for Alex to turn raw ingredients into cash from cupcake sales. A shorter cycle means money comes in faster.
Debt to Equity Ratio: This is like looking at how much money Alex borrowed (debt) compared to how much was invested (equity) to start the cupcake business. A lower ratio means less reliance on borrowed money.
Debt Ratio: Similar to debt to equity, but this time it’s showing what portion of Alex’s assets is funded by debt. Lower is usually better here.
Debt Service Coverage Ratio (DSCR): Think of this as Alex’s ability to pay off the loans used to buy cupcake equipment. A higher ratio means Alex can easily manage loan payments.
EBIT to Interest Coverage Ratio: This one’s about how well Alex’s cupcake sales (EBIT) cover the interest on loans. The higher, the better, as it means sales are comfortably covering loan interest.
Gross Margin Ratio (GPM): This shows how much money Alex makes on each cupcake after deducting the cost of making them. Higher margins mean more profit.
Net Profit Margin (NPM): After covering all expenses, this ratio tells us how much of each dollar earned is actual profit. Higher is better for Alex.
Operating Profit Margin (OPM): This is like NPM but focuses on profit from core cupcake operations. A higher OPM means Alex’s cupcakes are making good money.
Price-to-Earnings (P/E) Ratio: Imagine you want to buy a share of Alex’s cupcake business. This ratio helps you decide if it’s a good deal based on the price compared to the earnings (profits) it generates.
Price-to-Sales (P/S) Ratio: Similar to P/E but instead compares the price of a share to the total sales of the cupcake business.
Price-to-Book (P/B) Ratio: If you wanted to buy the whole cupcake business, this ratio helps you decide if the price is reasonable compared to the book value (assets minus liabilities).
Debt-to-Asset Ratio: This ratio tells us what portion of Alex’s assets are financed by debt. Lower ratios mean lower financial risk.
Price-to-Cash Flow (P/CF) Ratio: Again, if you’re thinking of buying Alex’s cupcake business, this ratio helps you decide if the price is reasonable compared to the cash the business generates.
Inventory Turnover Ratio (yes, again): This time, it’s about how quickly Alex sells cupcakes compared to the cost of making them.
Price-to-Earnings Growth (PEG) Ratio: If you’re an investor, this ratio helps you understand if the price of the cupcake business is reasonable relative to its expected earnings growth.
Interest Coverage Ratio: It’s like making sure Alex’s cupcake earnings can comfortably cover the interest on loans, ensuring financial stability.
Return on Capital Employed (ROCE): This tells us how efficiently Alex is using the money invested in the business to generate profits.
Debt-to-Equity (D/E) Ratio (yes, again): A reminder of how much of Alex’s business is funded by debt compared to equity.
Operating Profit Percentage: This ratio shows the percentage of sales that become operating profit. A higher percentage is a good sign for Alex.
Efficiency Ratios (again): These ratios help us understand how efficiently Alex manages inventory, receivables, and payables to optimize cash flow.
Free Cash Flow Ratio: It’s like looking at how much extra cash Alex has after running the cupcake business and investing in it. Positive free cash flow is a good sign.
Defensive Interval Ratio: This measures how long Alex’s cupcake business could survive without any additional sales. A longer period is better for stability.
Receivables Turnover Ratio (DSO): This ratio tells us how quickly Alex collects payments from customers.
Cash Burn Rate: This is like looking at how fast Alex spends cash to keep the cupcake business going. A lower burn rate means the business can keep running longer without running out of cash.
Debt to EBITDA Ratio (yes, again): It’s about assessing Alex’s ability to pay off debt using EBITDA (earnings before interest, taxes, depreciation, and amortization).
Gross Profit Margin (again): A reminder of how much money Alex makes on each cupcake before other expenses.
Operating Profit Margin (again): A reminder of how much profit Alex makes from core cupcake operations.
Net Profit Margin (again): A reminder of how much profit Alex makes after covering all expenses.
Cash to Debt Ratio: This ratio helps us understand if Alex has enough cash on hand to cover debts. A higher ratio is safer.
Defensive Interval Ratio (again): Another reminder of how long Alex’s business can survive without additional sales.
Receivables Turnover Ratio (DSO) (again): Another reminder of how quickly Alex collects payments from customers.
Operating Cycle: This is like the journey a cupcake takes from being baked to being sold. A shorter cycle means quicker cash flow.
Debt to Capital Ratio: Similar to D/E ratio, it shows how much of Alex’s business is financed by debt compared to total capital.
Equity Ratio: It’s like a snapshot of how much of Alex’s business is truly owned (equity) compared to what’s borrowed (debt).
Earnings Yield: If you’re thinking of investing in Alex’s cupcake business, this ratio helps you understand how much you could earn relative to the price you pay for a share.
Market Capitalization: This tells you the total value of Alex’s cupcake business in the stock market.
Book Value: It’s like looking at the net worth of Alex’s cupcake business based on its assets and liabilities.
Return on Invested Capital (ROIC): This tells us how well Alex is generating returns for the money invested in the business.
Credit Rating: This is like Alex’s credit score for the cupcake business, helping lenders assess the risk of lending money.
Enterprise Value: If you want to buy the whole cupcake business, this is the price you’d likely have to pay, including debt and equity.
Debtor Days (DSO) (again): One more reminder of how quickly Alex collects payments from customers.
Financial Leverage: It’s like understanding how much Alex is amplifying returns (or losses) by using debt.
Piotroski Score: Think of this as a scorecard that assesses the financial health of Alex’s cupcake business based on various factors.
Growth Factor (G Factor): This helps you gauge the potential for growth in Alex’s cupcake business.
Working Capital Days: It tells you how long Alex can keep the business going with the current working capital.
Graham Number: This is like a valuation tool to see if Alex’s cupcake business is priced fairly for value investors.
Public and Institutional Holdings: It shows who else is investing in Alex’s cupcake business, which can indicate confidence in the company.
Change in Ownership: This is like keeping track of who’s in charge of the cupcake business and whether there have been recent changes.
Days Payable Outstanding (DPO): It’s about how long Alex can take to pay bills to suppliers.
Days Receivable Outstanding (DRO): Another reminder of how quickly Alex collects payments from customers.
Days Inventory Outstanding (DIO): It tells you how long Alex holds on to cupcakes before selling them.
Export Percentage: This ratio indicates how much of Alex’s cupcake goodness is being shipped to customers outside the local market.
Unpledged Promoter Holding: It shows how much of the cupcake business’s ownership is held by the person who started it (the promoter) without using it as collateral.
Industry PE and PBV: These ratios help you compare Alex’s cupcake business to others in the same industry to see if it’s overpriced or a good deal.
Change in FII and DII Holdings: This tells us if foreign institutional investors (FII) and domestic institutional investors (DII) are increasing or decreasing their stakes in Alex’s cupcake business.
Price to Sales (again): One more reminder of this ratio, comparing the stock price to the total sales of the cupcake business.
Net Worth: This is like the financial value of Alex’s cupcake business, including assets, minus liabilities.
Intrinsic Value: It’s like trying to figure out the true worth of Alex’s cupcake business based on its fundamentals.
Altman Z Score: Think of this as a financial health score for Alex’s cupcake business, indicating the risk of bankruptcy.
EVEBITDA (Enterprise Value to EBITDA): This ratio helps you see the value of the entire cupcake business relative to its earnings before interest, taxes, depreciation, and amortization.
Debt to Profit: It shows how much of the profit goes into servicing debt. A lower ratio is generally safer.
Total Capital Employed: This tells us how much money Alex has put into the cupcake business, including equity and debt.
CROIC (Cash Return on Invested Capital): It’s like understanding how efficiently Alex is using the money invested in the business to generate cash returns.
52w Index, Up/Down from 52w High or Low: This helps you see how the stock price of Alex’s cupcake business has performed over the past year, whether it’s near its high or low point.
Market Cap to Quarterly Profit: This ratio helps you gauge the cupcake business’s size relative to its recent quarterly profits.
Debt Capacity: It’s like understanding how much more debt Alex’s cupcake business can take on without becoming too risky.
Market Cap to Debt Cap: This ratio tells you how the market values the cupcake business relative to its total debt.
Leverage: It’s a measure of how much debt Alex’s cupcake business has compared to equity. Higher leverage means more debt.
Graham’s Formula: This is a way to assess if Alex’s cupcake business is undervalued or overvalued based on earnings and growth.
NCAVPS (Net Current Asset Value Per Share): It’s like looking at the value of Alex’s cupcake business based on its current assets minus current liabilities per share.
Market Cap to Cash Flow (again): One more reminder of this ratio, helping you understand the market’s valuation compared to cash flow.
Market Cap to Sales (again): Another reminder of this ratio, comparing the market’s valuation to sales.
Up from 52w Low: This tells you how much the stock price has increased from its lowest point in the past year.
Down from 52w High: Conversely, this shows how much the stock price has dropped from its highest point in the past year.
Phew, that was quite the journey through financial ratios! Just like Alex’s cupcake business, these ratios are tools to help you assess the financial health and performance of a company. Each one provides a different perspective, so it’s important to use them together to get a well-rounded view.
Once upon a time in a town called Financeville, there lived a savvy investor named Alice. She had a knack for making smart money decisions. One sunny morning, she decided to explore the magical forest of Ratios. This forest was known for its various creatures, each with a unique power.
The Liquidity & Financial Health Pond:
Alice’s journey began by the side of a peaceful pond called “Liquidity & Financial Health.” This pond was all about having enough cash on hand to handle your immediate needs. Imagine it as having some spare cash in your wallet for an unexpected pizza party!
- Current Ratio: This is like making sure you have enough gas in your car for a road trip. It tells you if you can cover your short-term bills with your short-term assets.
- Quick Ratio: Think of this as paying your bills without resorting to selling lemonade from your lemonade stand in a hurry. It considers cash and near-cash assets but excludes inventory.
- Cash Ratio: This one’s like having cash tucked under your mattress for a rainy day. It tells you how much cold, hard cash you have compared to what you owe.
- Operating Cash Flow Ratio: Picture it as ensuring your plant (your business) has enough roots (cash) to keep growing. It measures cash generation from your everyday operations.
- Working Capital Ratio: Think of it as comparing your wallet to your monthly bills. It’s about your ability to cover your short-term debts.
The Efficiency Meadow:
As Alice continued her journey, she stumbled upon the Efficiency Meadow, where the grass was always greener on the efficient side. Here, she encountered creatures that helped her understand how efficient her business operations were.
- Inventory Turnover Ratio: This is like dusting off old books on a shelf; it measures how quickly you sell and replace inventory.
- Accounts Receivable Turnover Ratio: Imagine it as chasing down payments from your friends who owe you money. It gauges how quickly you collect payments from your customers.
- Cash Conversion Cycle: This is all about turning your investments (inventory, accounts receivable) into cash efficiently. It’s like turning your baseball cards into cash at the right time.
The Debt & Profit Castle:
Alice’s journey then took her to the imposing Debt & Profit Castle. Inside, she learned about how debt and profits played a critical role in financial decision-making.
- Debt to Equity Ratio: This is like balancing your house down payment (equity) with your mortgage (debt). It tells you how much of your financing comes from debt versus your own resources.
- Debt Ratio: Think of it as managing your personal debt compared to your total income. It expresses debt as a percentage of your assets.
- Debt Service Coverage Ratio (DSCR): Imagine it as comparing your income to your car loan payments. It measures your ability to cover debt payments.
- EBIT to Interest Coverage Ratio: This one’s like saving money for unexpected expenses. It evaluates if you can comfortably cover your interest expenses.
- Gross Margin Ratio (GPM): It’s akin to knowing how much profit you make after covering the cost of ingredients for your homemade pizza.
- Net Profit Margin (NPM): This considers all expenses, including taxes, to give you the true profit picture after all costs.
- Operating Profit Margin (OPM): Think of it as gauging the efficiency of your core income source, like your lemonade stand’s profitability.
Earnings & Stock Valuation Summit:
At the peak of her journey, Alice arrived at the Earnings & Stock Valuation Summit, where she understood how investors valued companies.
- Price-to-Earnings (P/E) Ratio: Imagine it as comparing the price of a snack to how much snack you get. It’s how investors evaluate if a stock is reasonably priced.
- Price-to-Sales (P/S) Ratio: This is like comparing the price of a pizza to how big it is. It helps investors assess if a company’s stock is a good deal.
- Price-to-Book (P/B) Ratio: Think of it as comparing the price of a used car to its book value. It helps determine if a stock is over or undervalued.
The Grand Finale — All Ratios Together:
As Alice journeyed back from the summit, she realized that all these ratios were like pieces of a puzzle. When you put them together, they give you a complete picture of a company’s financial health and performance.
For instance, by combining the Debt to Equity Ratio with the Interest Coverage Ratio, you can assess how well a company handles its debt. Just like you would think twice about buying a car if you had to stretch your finances to cover the loan payments.
Similarly, understanding a company’s Price-to-Earnings (P/E) Ratio in conjunction with its Net Profit Margin (NPM) can help you decide if a stock is a good investment. It’s like choosing snacks wisely — you want value for your money!