Ratios Made Simple: A beginner's guide to the key financial ratios

by Robert Leach

Overview

Ratios provide an extremely effective method of understanding company accounts. At their most basic this usually involves taking one figure from the published accounts and dividing it by another - however, this seemingly simple process can reveal an enormous amount about both the nature and performance of a company. 'Ratios Made Simple' looks at ratios from the perspective of an investor, providing a toolkit for investors to use to accurately analyse a company from its accounts. This book is divided into nine chapters, with each chapter looking at a different aspect of potential concern to an investor: 1. Profitability Ratios 2. Investment Ratios 3. Dividend Cover 4. Margins 5. Gearing 6. Solvency Ratios 7. Efficiency Ratios 8. Policy Ratios 9. Volatility For each ratio, financial expert Robert Leach provides a detailed definition, explains how it works, describes its use. Investors are also given a simple explanation of how to calculate each ratio, what the ratio means and how the investor should apply the answers in making investment decisions. This book provides the investor with an essential guide to the use of these powerful analytical tools - tools that should form a vital part of an investor's decision-making process.

Product Details

ISBN-13:	9781906659844
Publisher:	Harriman House
Publication date:	10/18/2010
Pages:	176
Product dimensions:	5.50(w) x 8.50(h) x 0.38(d)

About the Author

Robert Leach FCCA FIPPM ACertCM is a certified accountant, private investor and author of over 30 books. His titles include How to Make Money on the Stock Exchange (Foulsham), Financial Times Guide to Your Company Pension, Allied Dunbar Guide to Financial Planning for the Over 50's and The Investor's Guide to Understanding Accounts. For two years he was a judge of the Stock Exchange Awards for best published accounts. He is the author of the looseleaf works Payroll Factbook and Tax Factbook published by Sweet & Maxwell. He also writes for newsletters, magazines, newspapers and anyone else who will pay him. www.robertleach.co.uk

Table of Contents

About the Author v

Introduction vii

1 Profitability Ratios 1

1.1 Earnings Per Share (EPS) 3

1.2 Price-to-Earnings Ratio (P/E) 13

1.3 Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortisation Ratio (EV/EBITDA) 21

1.4 Price-to-Sales Ratio (PSR) 25

2 Investment Ratios 29

2.1 Dividend Yield 31

2.2 Total Return 37

2.3 Return On Capital Employed (ROCE) 41

2.4 Return On Equity (ROE) 47

2.5 Premium to Asset Value (PAV) 51

2.6 Internal Rate of Return (IRR) 55

2.7 Return On Assets (ROA) 59

2.8 Dividend Payout Ratio 61

3 Dividend Cover 63

3.1 Dividend Cover 65

4 Margins 69

4.1 Gross Margin and Net Margin 71

4.2 Overheads to Turnover 77

5 Gearing 79

5.1 Gearing Ratio 81

5.2 Interest Cover 89

6 Solvency Ratios 93

6.1 Acid Test 95

6.2 Current Ratio 99

6.3 Cash Burn 101

6.4 Defensive Interval 105

6.5 Fixed Charges Cover 107

7 Efficiency Ratios 109

7.1 Stock Turn 111

7.2 Price-to-Book Value (PBV) 115

7.3 Overtrading and Undertrading 117

7.4 Item Comparison 121

8 Policy Ratios 125

8.1 Creditor Period 127

8.2 Debtor Period 131

8.3 Fixed Asset Spending Ratio 133

9 Volatility 137

9.1 Volatility Ratio 139

9.2 Standard Deviation 143

Appendix 149

Index 155