Return On Equity (ROE): This ratio indicates how much a business makes in terms of net income for every dollar that shareholder’s invest into it. A higher ROE indicates high profitability rates, a low ROE indicates low profitability rates.
Return On Equity= Net Income/Shareholder’s Equity
Price to Book Ratio (P/B Ratio): It compares the value of a business shares in the stock’s market with its book value (par value). This ratio is calculated by dividing the current price of stock by the book value for each share.
A lower price shows that the business is undervalued. A high price shows it is overvalued.
P/B Ratio= Stock’s Market price per share/ Book Value per Share
Also P/B Ratio= Stock’s Market Value/ (Total Assets- Intangible assets and liabilities)
Accounts Receivables/Sales: This ratio shows the proportion of credit sales to the business total sales. A high ratio shows a high level of credit sales, which is bad for the business since it may strain the business’s finances.
AR/Sales= Credit Sales (Accounts Receivable)/Total Sales
Retained Cash Flow/ Debt: Retained Cash Flow (RCF) refers to the cash that the business has after utilizing its finances in expenses and dividends. RCF/Debt ratio indicates the amount of money that a business has at its disposal in relation to its debt. If the ratio is small, it is risky since most of its cashflow is from debt. It is calculated by dividing RCF with Debt
Funds From Operation/ Total Debt: This ratio indicates the amount of money that a business makes from it normal business activities in comparison to its debt. It is calculated by dividing the funds from ordinary business activities by the company’s total debt. If the ratio is small, it indicates that the business is highly leveraged, which is risky.
Debt/ Book Capitalization: This ratio indicates the level of a business leverage as a percentage of its capitalization. A high ratio is risky since it indicates that the business highly depends on loans. A low ratio is most appropriate.
Total Debt to Capitalization= (Short term debt + Long term debt)/ (Short term debt + Long term debt + Shareholder’s Equity)
Debt/EBITDA: This ratio indicates a business’ ability to repay its debts. A high ratio indicates that a business may default on its payments. A small ratio indicates that it will comfortably repay its debts.
Debt/EBITDA= Debt/ EBITDA
EBITDA/Net Revenue: This ratio indicates how much a business earns from its total sales. Since EBITDA is derived from revenue, it constitutes the portion that is left once expenses have been deducted, which is a profit. Therefore, a high EBITDA/Net Revenue indicates that a business will remain profitable. A small ratio indicates that the business may fail
EBITDA/Net Revenue= EBITDA/Revenue (Sales)
EBITDA/ Interest Expense: This ratio indicates the ability of a business to repay its interest expense. A high margin is best since it shows that the business will easily repay the interest expense. It is calculated using the formula
EBITDA To Interest Coverage Ratio = EBITDA / Interest Payments
EBITDA/ Total Assets: This ratio indicates how effectively the business is using its total assets to make earnings for the business. It is calculated by dividing the EBITDA by the total assets. A high ratio is best since it shows high earning margins.