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Net Profit Margin = Net Profit after Tax / Net Sales It is an indicator of a company's pricing strategies and how well it controls costs. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss, or a negative margin. Used for internal comparison 2. Current Ratio = Current Assets / Current Liabilities An indication of a company's ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is. Current ratio is equal to current assets divided by current liabilities. - If the current assets of a company are more than twice the current liabilities (>1), then that company is generally considered to have good short-term financial strength. If the current ratio is too high, then the company may not be efficiently using its current assets or its short-term financing facilities. This may also indicate problems in working capital management. (for example: ratio = 1.25 -> Company would be in relatively good short-term financial standing). - If current liablities exceed current assets (<1), then the company may have problems meeting its short-term obligations. If an organization has good long-term prospects, it may be able to borrow against those prospects to meet current obligations. 3. Quick Ratio = (Current Assets Inventory) / Current Liabilities A measure of a company's liquidity and ability to meet its obligations. Quick ratio, often referred to as acid-test ratio, is obtained by subtracting inventories from current assets and then dividing by current liabilities. Quick ratio is viewed as a sign of company's financial strength or weakness (higher number means stronger, lower number means weaker). For example, if current assets equal $15,000,000, current inventory equals $6,000,000, and current liabilities equal $3,000,000, then quick ratio amounts to: ($15,000,000 - $6,000,000)/ $3,000,000 = 3. Since we subtracted current inventory, it means that for every dollar of current liabilities there are three dollars of easily convertible assets. In general, a quick ratioof 1 or more is accepted by most creditors; however, quick ratios vary greatly from industry to industry. 4. Cash Ratio = Cash / Current Liabilities Total dollar value of cash and marketable securities divided by current liabilities. For a bank this is the cash held by the bank as a proportion of deposits in the bank. The cash ratio measures the extent to which a corporation or other entity can quickly liquidate assets and cover shortterm liabilities, and therefore is of interest to short-term creditors. also called liquidity ratio or cash asset ratio. 5. Market to Book Ratio (Price to Book Ratio) = Market Value / Book Value = Market Capitalization / Total Shareholders Equity Example: Jenapharm was the most respected pharmaceutical manufacturer in East Germany. Revenues = 230 million; EBIT = 30 Book value of assets = 110 million Book value of equity = 58 million Interest expenses = 15 million Corporate tax rate = 40% Growth at 5% a year in the long term Average beta of pharmaceutical firms traded on the Frankfurt Stock exchange was 1.05 Ten-year bond rate in Germany at the time of this valuation was 7% Risk premium for stocks over bonds is assumed to be 5.5%. Estimate Price/Book Ratio? - Expected Net Income = (EBIT - Interest Expense)*(1-t) = (30 - 15) * (1-0.4) = 9 mil - Return on Equity = Expected Net Income / Book Value of Equity = 9 / 58 = 15.52% - Cost on Equity = 7% + 1.05 (5.5%) = 12.775%

Price/Book Value Ratio = (ROE - g) / (r - g) = (.1552 - .05) / (.12775 - .05) = 1.35 Estimated MV of equity = BV of Equity * Price/BV ratio = 58 * 1.35 = $78.3 mil

6. Deb/Equity Ratio A measure of a company's financial leverage. Debt/equity ratio is equal to long-term debt divided by common shareholders' equity. Typically the data from the prior fiscal year is used in the calculation. Investing in a company with a higher debt/equity ratio may be riskier, especially in times of rising interest rates, due to the additional interest that has to be paid out for the debt. For example, if a company has long-term debt of $3,000 and shareholder's equity of $12,000, then the debt/equity ratio would be 3000 divided by 12000 = 0.25. It is important to realize that if the ratio is greater than 1, the majority of assets are financed through debt. If it is smaller than 1, assets are primarily financed through equity. 7. Inventory Turnover = COGS / Inventory The ratio of a company's annual sales to its inventory; or equivalently, the fraction of a year that an average item remains in inventory. Low turnover is a sign of inefficiency, since inventory usually has a rate of return of zero. For instance, if a company was able to generate $10 million in sales but averaged $5 million in inventory, the inventory turnover would be 10 million / 5 million = 2. This number indicates that there would be 2 inventory turns per year, meaning that it would take 6 months to sell all the inventory. 8. Days of Inventory = Inventory / (COGS/365) A measure of performance, calculated by average inventory divided by average daily cost of sales. This returns a figure equivalent to the number of days an item is held as inventory before it is sold. The lower the days inventory, the more efficient the company is, all other things being equal. Days inventory is the first step measured in the cash conversion cycle, which represents the process of turning raw materials into cash. For example: - If a company has maintained its inventory quantities, but economic factors cause a significant drop in its sales, the companys inventory days will increase dramatically. - If a retailer increases its inventory in order to generate additional sales, but sales do not increase, there will also be an increase in the number of inventory days. 9. Receivables Turnover = Sales / Account Receivables The receivables turnover ratio is used to calculate how well a company is managing their receivables. The lower the amount of uncollected monies from its operations, the higher this ratio will be. In contrast, if a company has more of its revenues awaiting receipt, the lower the ratio will be. 10. Days of sales outstanding = Average Collection Period = AR / (Annual Sales/ 365) Since it is profitable to convert sales into cash quickly, which means that a lower value of Days Sales Outstanding is favorable whereas a higher value is unfavorable. However it is more meaningful to create monthly or weekly trend of DSO. Any significant increase in the trend is unfavorable and indicates inefficiency in credit sales collection. 11. Payables Turnover = COGS / AP Investors consider a falling ratio a sign that the company is taking longer to pay suppliers than before, which might suggest cash flow problems. However, a rising ratio would suggest a relatively short time between purchase of goods and services and payment. A falling accounts payable turnover ratio may suggest one of two scenarios: - First, the business might be experiencing cash flow problems or disputed invoices with suppliers, which leads to slower payment. - However, a successful business may extend payments to make the best possible use of cash and might have negotiated more favorable payment terms with suppliers.

12. Days of Payables = Average Payment Period = Account Payable / (Annual Purchases/365) The average number of days a company takes to pay its bills, used as a measure of how much it depends on trade credit for short-term financing. As a rule of thumb, a well managed company's days accounts payable do not exceed 40 to 50 days. Also called days sales in payables.