Whether you're managing your portfolio for yourself or for someone else, here are 20 balance sheet ratios you may want to be aware of. Thoughts?
Solvency Ratios
1. Quick Ratio = (Current Assets – Inventories) / Current Liabilities
2. Current Ratio = Current Assets / Current Liabilities
Debt to Equity Ratios
3. Total Debt/Equity Ratio = Total Liabilities / Shareholders Equity
4. Long Term Debt/Equity Ratio = Long Term Debt / Shareholders Equity
5. Short Term Debt/Equity Ratio = Short Term Debt / Shareholders Equity
6. Activity Ratios
7. Days Sales Outstanding = (Receivables / Revenue) x 365
8. Days Inventory Outstanding = (Inventory / COGS) x 365
9. Days Payable Outstanding = (Accounts Payable / COGS) x 365
10. Cash Conversion Cycle = DIO + DSO – DPO
Turnover Ratios
11. Receivables Turnover = Revenue / Average Accounts Receivables
12. Inventory Turnover = COGS / Average of Inventory
13. Average Age of Inventory = Average of Inventory / Revenue
14. Intangibles to Book Value = Intangibles / Book Value
15. Inventory to Sales = Inventory / Revenue
Capital Structure Ratios
16. LT-Debt as % of Invested Capital = Long Term Debt / Invested Capital
ST-Debt as % of Invested Capital = Short Term Debt / Invested Capital
17. LT-Debt to Total Debt = Long Term Debt / Total Debt
18. ST-Debt to Total Debt = Short Term Debt / Total Debt
19. Total Liabilities to Total Assets = Total Liabilities / Total Assets
20. Price to Working Capital = Price / Working Capital per Share
This is a comprehensive list of important ratios, and I did not think that every single one of these mattered. As a student looking into asset management, would you guys say all of these ratios are crucial to know? Are there any missing from this list? The article itself explains why ratio is important, and is definitely worth the read.
Yes, some of those are important. I'd be prepared to answer some basic ones. I've been asked about current and quick ratios in the past, ROE, and maybe total asset turnover but not much more than that (Obviously basic profitability margins are a necessity). Never anything related to cash cycles, but it would depend on where you're interviewing too. However a ratio analysis is a small piece of the pie.
Honestly what's more important is understanding why the ratio in question is important to a specific analysis, or industry. For example you're thinking of investing in one of 2 companies; does Company A operate with a high degree of operating leverage vs Company B that utilizes a more variable cost structure? If you're analysis incorporates significant amount of industry growth, the high operating leverage Company A you would anticipate to be more profitable. On the other hand the lower operating leverage Company B would be able to lean down faster if the industry was contracting and would (in a vacuum) have a better chance of maintaining profitability. Hope this helps, and good luck.
A few of these ratios are very non-standard. However, most of them can give you some insight into the company at hand. Wouldn't say these are ratios every investor must know.
Debt/ EBITDA and EBITDA/ interest should be on there. Also, like LW the 3rd stated, industry or sector specific ratios/ metrics are probably even more important.
How in the world does leverage (Debt/EBITDA) not make the list?
Technically it's on there. It's just that there's a million ways to think about leverage.
where is it? i need new glasses!
The entire debt/equity section is a form / derivative of whatever you might want to call as "leverage". I think I might have opened a can of worms with tons of people soon to jump suggesting it's not what leverage is.
First of all , debt/ebitda is a hybrid p&l and b/s metric so that may be the reason it was left off the list (i.e. numerator debt being static b/s item and denominator ebitda a period of time p&l item)
Second, I disagree with your comment that debt/ebitda is technically there as debt/ebitda and debt/equity are different types leverage measurements. debt/ebitda ratio gives an indication of that the operation of a firm's ability to service/pay back the debt in x years/turns (assuming ebitda is held at a constant through maturity of debt). debt/equity is just a relative share of debt to equity on b/s, it really doesn't give you an indication of debt service (yes you could liquidate equity in a wind up event, but as a going concern it doesn't provide enough info on debt servicing)
DUPONT ROE
Though I guess this isn't a balance sheet ratio
Yeah, I mean, this is basic undergrad accounting and balance sheet analysis. Also, some of these items are from the income statement, not just the balance sheet, so I'd include Free Cash Flow Per Share if we're going off more than just the balance sheet.
free cash flow is the bread and butter
Price/Working Capital. Wait what?
(Working Capital - Total Liabilities), if positive number, compare to the price (Graham style). But yeah, in this form it's dead odd.
OP, I like the structure of your thoughts.
My top 3 for skimming through publicly-traded companies are EBIT (or EBITDA) margin, PE (or PEG) ratio, Net Debt/EBITDA - how profitable? how expensive? how leveraged?
For a student who's still interviewing, I wouldn't recommend overthinking this stuff. Most of these ratios are very narrow in purpose, and a few of them look like they're ripped straight out of an accounting class syllabus. Definitely not ratios that "every investor should be aware of"-- a lot of them may be useful to you at some point or another in your career, but you probably won't be asked about any of them as an undergraduate.
For undergraduate interviews, it's more important that you put together a good stock pitch where you can demonstrate strong investing intuition. This means you need to have a strong understanding of a company's business model on a qualitative level. On a quantitive level, it'll help to know basic valuation (so like, Enterprise Value/EBITDA and stuff) and profitability ratios (EBITDA margin), but price to working capital? Come onnnnn
I use MarketXLS for this and it's great.
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