Financial Ratios for Executives

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Contents
About the Authors ��������������������������������������������������������������������������������������� vii
Acknowledgments������������������������������������������������������������������������������������������ix
Preface������������������������������������������������������������������������������������������������������������xi
Chapter 1: Ratios Overview���������������������������������������������������������������������� 1
Chapter 2: Ratios Description ������������������������������������������������������������������ 7
Chapter 3:

ABC Company ���������������������������������������������������������������������107

Chapter 4:

Capital Allocation�����������������������������������������������������������������115

Appendix A: Abbreviations �����������������������������������������������������������������������125
Appendix B: Useful Websites���������������������������������������������������������������������127
Index�������������������������������������������������������������������������������������������������������������129

CHAPTER

1
Ratios Overview
The ratios in this book are tools. They are primarily tools for turning the
data contained in financial statements into information used by managers and
executives to better understand what is happening in a company. Like all tools,
they can be used for things other than their original design, such as evaluating
an acquisition, creating pro-forma statements related to potential courses of
action, or figuring out which stock to buy.
Financial ratios can typically be grouped into one of the following ratio types:
• Market value ratios
• Liquidity ratios
• Performance ratios
• Cash flow ratios
• Profitability ratios
• Debt ratios
There are a small number of ratios that do not fit into any of these categories.
However, we have included them as we have found them very useful ourselves
and believe that they make for a more complete book.

2

Chapter 1 | Ratios Overview
Once a company has had several years of financial ratios, these can then be
compared across these years to see if there is a positive or negative development. There are many ratios and all are great to use when a development is
to be analyzed.
The following sections provide a short overview of each of the above ratio
types along with a list of common examples, all of which will be defined and
discussed in subsequent chapters.

Market value ratios
Market value ratios measure how cheap or expensive the company’s stock
is based on some measure of profit or value. Market value ratios can assist
management or an investor in assessing the market’s opinion of the company’s
value. Generally, the higher the market value ratio, the higher the company’s
stock price will be because the market thinks growth prospects are good and/
or they believe the company to be less risky as an investment.
Common market value ratios include the following:
• Dividend payout ratio
• Dividend yield
• Earnings per share (EPS)
• Enterprise value
• Price to book value ratio
• Price to earnings ratio (P/E ratio)

Financial Ratios for Executives

Liquidity ratios
Liquidity ratios measure the company's ability to pay off short-term debt
­obligations. Most obviously, they can be used to see if a company is in ­trouble
and evaluate their ability to make loan payments or pay suppliers. Less
­obviously, they can be used to judge a company’s ability to take on more debt,
or spend more cash, to explore new means for growth through innovation or
acquisition.
Common liquidity ratios include the following:
• Acid test
• Cash conversion cycle
• Cash ratio
• Current ratio
• Operating cash flow
• Quick ratio
• Working capital

Performance ratios
Performance ratios (also known as activity ratios) measure a company’s ability
to generate sales and derive profit from its resources. Performance ratios are
used to measure the relative efficiency of a company based on the use of its
assets, leverage, or other such balance sheet items.
Companies must often strike a balance between the inefficiencies of having
too few or too many assets. For example, in the case of too little inventory,
you may risk disruption to production and loss of sales. However, sitting on
inventory that does not move is a very inefficient use of cash.

3

4

Chapter 1 | Ratios Overview
Common performance ratios include the following:
• Average collection period
• Fixed assets turnover
• Gross profit margin
• Inventory turnover
• Receivable turnover
• Total assets turnover

Cash flow ratios
Cash flow ratios measure how much cash is generated and the safety net that
cash provides to the company to finance debt or grow the business. Cash flow
ratios provide an additional way of looking at a company’s financial health and
performance. Many use the term “cash is king” because it is so vital to the
health of an organization.
Common cash flow ratios include the following:
• Cash flow coverage
• Dividend payout ratio
• Free cash flow
• Operating cash flow

Profitability ratios
Profitability ratios can be thought of as the combination of many of the other
more specific ratios to show a more complete picture of a company’s ­ability
to generate profits. The king of all ratios, return on equity (ROE), can be
­broken down by the DuPont formula in simple terms as ROE = Margin x Turn
x Leverage. You can see how this takes into account other operating ratios.
Many of the ratios in this section follow the same concept.
Common profitability ratios include the following:
• Current yield
• Profit margin
• Return on assets (ROA)
• Return on net assets (RONA)
• Return on equity (ROE)
• Return on investment (ROI)

Financial Ratios for Executives

Debt ratios
Debt ratios measure the company’s overall debt load and the mix of equity
and debt. Debt ratios give us a look at the company’s leverage situation.
Debt ratios can be good, bad, or indifferent, depending on a host of factors
including who is asking. For example, a high total debt ratio may be good for
stockholders not wanting to dilute their shares but bad for the creditors of
the company.
Common debt ratios include the following:
• Asset to equity
• Asset turnover
• Cash flow to debt ratio
• Debt ratio
• Debt to equity
• Equity multiplier
• Interest coverage

5

CHAPTER

2
Ratios
Description
Each ratio or calculation in this book is presented on its dedicated page in the
following standard format:
• Type of ratio (performance ratio, liquidity ratio, and so on)
• Formula for calculating the ratio
• Description of the ratio
• Example based on ABC Company or XYZ Company
 

• Synonyms (e.g., quick ratio is a synonym for acid test)

■■Note  For completeness and easy reference, each ratio synonym has its own dedicated page.

Most ratio calculations are based on data from the hypothetical ABC
Company, whose financial data are listed in that company’s income statement,
balance sheet, cash flow statement, and additional company information given
in Chapter 3.
Where the ABC Company data are not applicable to certain ratio calculations, we use data from the hypothetical XYZ Company.

Financial Ratios for Executives

Acid test (Quick ratio)
Type: Liquidity measure
Formula
Acid test =

Current assets - Inventory
Current liabilities

Description
The acid test ratio shows whether a company has enough short-term assets
to cover its immediate liabilities without selling inventory. The higher the acid
test ratio, the safer a position the company is in.
Example
ABC Company has currents assets in the amount of $69,765, inventory in the
amount of $24,875, and current liabilities in the amount of $28,500. This gives
an acid test of 1.58. An acid test of 1.58 indicates that the company has sufficient current assets to cover its current liabilities more than one and a half
times over without selling inventory.
Acid test =

69, 765 - 24 , 875
= 158
.
28, 500

The acid test is very similar to the current ratio except that it excludes inventory because inventory is often illiquid. The nature of the inventory and the
industry in which the company operates will determine if the acid test or the
current ratio is more applicable.
Note
The acid test is also known as the quick ratio.

9

10

Chapter 2 | Ratios Description

Account receivable turnover
(Receivable turnover)
Type: Performance measure
Formula
Accounts receivable turnover =

Sales
Receivables

Description
The accounts receivable turnover measures the number of times receivables
are converted into cash in a given period. This is different from the average
collection period, which shows the number of days it takes to collect the
receivables.
Ideally, credit sales should be used in the numerator and average receivables
in the denominator. However, these are most often not easily available in the
financial statements.
Example
ABC Company has sales in the amount of $210,000 and accounts receivable
in the amount of $28,030. This gives an accounts receivable turnover ratio
of 7.49. The higher the accounts receivable turnover ratio, the better the
company is at converting receivables into cash. A decline in the turnover ratio
could mean either a decline in sales or an indication that the customers are
taking a longer time to pay for their purchases.
Accounts receivable turnover =

210, 000
= 7.49
28, 030

The company can improve the turnover ratio by many methods; the most
popular is by offering a discount if the customers pay their outstanding
balance earlier; for example, within 30 days of the sale.
Note
Accounts receivable turnover is also known as receivable turnover.

Financial Ratios for Executives

Additional funds needed (AFN)
Type: Other
Formula
AFN = Required - Spontaneous - Increase
asset
liabilities
in retained
increase
increase
earnings
Description
The additional funds needed (AFN) is an approximation tool to determine how
much external funding a company would require in order to increase sales (if
the company is operating at full capacity), given the amount of assets needed to
generate those sales. AFN tells you how much outside cash a company needs
to support linear growth. Because many of the factors used in AFN require
estimation, you can see that AFN really only provides a ballpark figure.
Example
The AFN equation can be written as follows:
AFN = (Ao/So) DS - (Lo/So) DS – M (S1) ´ (1 - POR)
• Required asset increase (Ao/So) DS
• Spontaneous liabilities increase (Lo/So) DS
• Increase in retained earnings M (S1) ´ (1 - POR)
Ao
So
DS
Lo
M
S1
POR

Total assets (Current year)
Sales (Current year)
Change in sales (10% sales growth)

132,000
210,000
21,000

Spontaneous liabilities (accounts payables)
(Net) Profit margin
New sales (Original + Change in sales)
Payout ratio (Dividend/Net income)

18,460
4.51%
231,000
32%

Using the AFN formula, ABC Company would need an additional $4,223 to
support a 10% increase in sales.

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12

Chapter 2 | Ratios Description

Altman’s Z-Score
Type: Other
Formula
Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
A = Working capital/Total assets
B  = Retained earnings/Total assets
C = Earnings before interest & tax/Total assets
D = Market value of equity/Total liabilities
E  = Sales/Total assets
Description
The Altman’s Z-Score was developed to predict the probability that a company
will go into bankruptcy within two years. The lower the Z-Score, the greater
the probability the company will go into bankruptcy within the next two years.
A score less than 1.8 indicates that the company is likely headed for bankruptcy, whereas a score above 3.0 indicates that the company has a low risk
of bankruptcy.
Example
ABC Company has a Z-Score of 5.49. This means that there is a very low
probability of the company going into bankruptcy within the next two years.
Z-Score =
 1.2(1.29) + 1.4(0.36) + 3.3(0.42) + 0.6(0.77) + 1.0(1.59)
= 5.49
A
1
2
3
4
5
6
7
8
9

B

C

D

F

Factor Nominator Denominator Result
A
41,265
32,000
1.29
B
47,040
132,000
0.36
C
13,525
32,000
0.42
D
61,500
79,930
0.77
E
210,000
132,000
1.59
Z-Score

G

H

Factor
1.20
1.40
3.30
0.60
1.00

Value
1.55
0.50
1.39
0.46
1.59
5.49

I

Financial Ratios for Executives

Asset to equity
Type: Debt measure
Formula
Asset - to - equity =

Total assets
Shareholder equity

Description
The asset-to-equity ratio (also known as the equity multiplier) gives a sense of
how much of the total assets of a company are really owned by shareholders
as compared to those that are financed by debt. Some businesses thrive more
on borrowing money (leverage) than other companies.
High assets-to-equity may be good for them. However, there is always some
point for any company at which their assets are overleveraged. That can be
dangerous to the shareholders and their investment in the company (e.g.,
Lehman Brothers was so overleveraged in 2007 that their asset-to-equity was
31! Calls on their debt in 2008 more than wiped out the company).
Example
ABC Company has total assets in the amount of $132,000 and shareholder
equity in the amount of $52,070. This gives an asset-to-equity ratio of 2.54.
Thus, the business has about $2.54 of assets for every dollar of shareholder
equity.
Asset - to - equity =

132, 000
= 2.54
52, 07 0

Note
Debt financing typically offers a lower rate compared to equity. However, too
much debt financing is rarely the optimal structure because debt has to be
paid back even when the company is going through troubled times.

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14

Chapter 2 | Ratios Description

Asset turnover
Type: Performance measure
Formula
Asset turnover =

Sales
Assets

Description
The asset turnover ratio measures the sales generated per dollar of assets and
is an indication of how efficient the company is in utilizing assets to generate
sales.
Asset-intensive companies such as mining, manufacturing, and so on will generally have lower asset turnover ratios compared to companies that have
fewer assets, such as consulting and service companies.
Example
ABC Company has sales in the amount of $210,000 and total assets in the
amount of $132,000. This gives an asset turnover ratio of 1.59.
Asset turnover =

210, 000
= 1.59
132, 000

This means that for every dollar invested in assets, the company generates
$1.59 of sales. This number should be compared to the industry average for
companies in the same industry.

Financial Ratios for Executives

Audit ratio
Type: Other
Formula
Audit ratio =

Annual audit fee
Sales

Description
The audit ratio measures the cost of an audit in relation to the sales of the
company. An increase in the audit ratio could indicate that additional audit
procedures were required because of problems with the company’s accounting records or control procedures. It could also indicate additional procedures
were needed because of a change in legislation. When the Sarbanes-Oxley
Act was written into law, it resulted in significant increases in audit fees as a
result of additional testing and control procedures.
Example
ABC Company has sales in the amount of $210,000 and annual audit fees in
the amount of $200. This results in an audit ratio of 0.095%.
Audit ratio =

200
= 0.095%
210, 000

Note
There is not always a direct correlation between the revenue and the annual
audit fee, and it can vary significantly between various industries. However, as
a company grows, so, typically, do the audit fees. Within the same company this
number can be trended over time.

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16

Chapter 2 | Ratios Description

Average collection period
Type: Performance measure
Formula
Average collection period =

Days ´ Accounts receivable
Credit sales

Description
The average collection period indicates the amount of time (in days) it takes a
company to convert its receivables into cash.
Example
ABC Company has accounts receivable in the amount of $28,030 and credit
sales in the amount of $210,000. In this example, credit sales and total sales are
identical. This gives an average collection period of 48.72 days, which means
that it takes a little over one and a half months for the company to convert
credit sales into cash.
Average collection period =

365 ´ 28, 030
= 48.72 days
210, 000

The company’s credit terms will have a significant impact on the average collection period: the better the credit terms, the higher the average collection period. An increase in the average collection period could indicate an
increased risk of the company’s customers not being able to pay for their
purchases. A possible result is that the company will have to hold greater
levels of current assets as a reserve for potential losses or bad debt expense.
Most large companies (nonretail) do not handle many cash sales. Therefore,
when looking at financial statements, it can be assumed that total sales do not
include any cash sales. However, in smaller companies and in retail businesses,
cash sales can be a significant part of the total sales.
Note
The average collection period is also known as days sales outstanding.

Financial Ratios for Executives

Basic earning power (BEP)
Type: Profitability measure
Formula
Basic earnings power =

EBIT
Total assets

Description
The basic earning power (BEP) shows the earning power of the company’s
assets before taxes and debt service. It is useful for comparing companies
that otherwise could not be compared because of different tax situations and
different degrees of financial leverage. This ratio is often used as a measure of
the effectiveness of operations.
Example
ABC Company has earnings before interest and taxes (EBIT) in the amount of
$13,525 and total assets in the amount of $132,500. This gives a basic earnings
power ratio (BEP) of 0.10.
Basic earnings power =

13, 525
= 0.10
132, 500

This means that for every $100 invested in assets the company generates $10
of EBIT. This number can be compared to industry averages, or other companies, to gauge the operational effectiveness of generating profits.

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18

Chapter 2 | Ratios Description

Book value per share
Type: Market value measure
Formula
Book value per share =

Common equity
Shares outstanding

Description
The book value per share measures common stockholders’ equity determined
on a per-share basis and is an indication of how the investors view the value
of the company’s assets. If the market value per share is higher than the book
value per share, then the investor is willing to pay a premium over the book
value to acquire the company’s assets.
Example
ABC Company has common equity in the amount of $52,070 and a total
of 10,000 shares outstanding. This gives a book value per share of $5.20 at
December 31, 2013.
Book value per share =

52, 07 0
= 5.20
10, 000

ABC Company has a market value per share of $6.15. The reason could be
that there are certain intangibles assets within the company such as customer
list, distribution channels, or know-how, and so on, which the company cannot record as an asset under U.S. or international accounting standards. As
a result of this, the investor is willing to pay a premium over book value to
acquire the assets of the company.
Assets = Liabilities + Equity
Market value 141, 430 = 79, 930 + 61, 500
With a share price of $6.15, the market value of the equity is $61,500, which
means that the investor value the company’s assets to $141.430, $9,430 over
book value.

Financial Ratios for Executives

Breakeven point
Type: Cost accounting
Formula
Breakeven point =

Fixed cost
Contribution margin ratio

Description
The breakeven point, often used in cost accounting, is the point at which the
company breaks even on a given product and neither incurs a profit nor a loss.
The breakeven point shows the minimum amount of sales required for the
company to begin making a profit.
Example
XYZ Company is considering investing in a new production unit that costs
$1,000,000 to support the increased demands in sales. The fixed cost for
the new unit once installed is $200,000 annually. The company has calculated
a contribution margin of 68%. This gives a breakeven point of $292,306, or
61,538 units.
Breakeven point =

200, 000
= 292, 306
0.68

This table shows that the company breaks even, meaning that it incurs neither a profit nor a loss, when it sells 61.538 units which amounts to sales of
$292,306.
A
1
2
3
4
5
6
7

B
Description
Sales
Variable cost
Fixed cost
Break even

C

D

F

Units
61,538
(61,538)

Price
4.75
1.50

Total
292,306
(92,307)
(200,000)
-

I

19

20

Chapter 2 | Ratios Description

Capital asset pricing model (CAPM)
Type: Other
Formula
CAPM = Risk free rate + (Beta ´ Market risk premium )
Description
The capital asset pricing model (CAPM) is a theoretical model used to determine the required rate of return for an investor when considering a particular
stock to purchase. The stock’s required rate of return is equal to the risk-free
rate of return plus a risk premium reflecting only the risk remaining after
diversification.
Investors most often use 10-year U.S. treasury bill or bond rate as a proxy for
the risk-free rate. Beta is most often calculated by a third party and is available online. Market risk premium is the market rate of return less the risk-free
rate. The market rate of return can be based on past returns. The economist
Peter Bernstein calculated the average rate of return to be 9.6% over the past
200 years. This rate of return is often applied by investors when using the
capital asset pricing model.
Example
An investor could use CAPM to determine the required rate of return to
invest in ABC Company. If we assume that the rate of a 10-year U.S. treasury
bill is 2%, the Beta for ABC Company is 0.9, and the market rate of return is
9.6%, we can calculate CAPM as follows:
CAPM = 0.02 + (0.9 ´ ( 0.096 - 0.02 ) = 0.0884 = 8.84 %
By using CAPM, an investor can compare the required rate of return to an
expected rate of return for the company over the investment horizon. If the
investor does not think that the stock will yield a return of 8.84% over the
investment period, he should not buy the stock.

Financial Ratios for Executives

Capital structure ratio
Type: Debt measure
Formula
Capital structure ratio =

Long - term debt
Long - term debt + Shareholders equity

Description
The capital structure ratio, also known as the capitalization ratio, measures the
debt component of a company’s capital structure or how much of the company’s financing is represented by long-term debt.
Example
ABC Company has long-term debt in the amount of $16,750 and equity in the
amount of $52,070; this gives a capitalization ratio of 24.33%.
Capital structure ratio =

16, 750
= 24.33%
16, 750 + 52, 07 0

This capitalization ratio means that 24.33% of the company’s operations and
growth is financed by debt and 75.67% is financed by equity.
The amount of leverage that is right for the company varies based on the
industry in which the company operates and the maturity of the company as
well as other factors. What is optimal for one company might not be right for
another. However, low debt and high equity levels in the capitalization ratio
generally indicate lower risk for investors.
Note
Capitalization structure ratio is also known as capitalization ratio.

21

22

Chapter 2 | Ratios Description

Capitalization ratio
Type: Debt measure
Formula
Capitalization ratio =

Long - term debt
Long - term debt + Shareholders equity

Description
The capitalization ratio, also known as the capital structure ratio, measures the
debt component of a company’s capital structure or how much of the company’s financing is represented by long-term debt.
Example
ABC Company has long-term debt in the amount of $16,750 and equity in the
amount of $52,070; this gives a capitalization ratio of 24.33%.
Capitalization ratio =

16, 750
= 24.33%
16, 750 + 52, 07 0

This capitalization ratio means that 24.33% of the company’s operations and
growth is financed by debt and 75.67% is financed by equity.
The amount of leverage, that is, debt that is right for the company varies based
on the industry in which the company operates and the maturity of the company as well as other factors. What is optimal for one company might not be
right for another. However, low debt and high equity levels in the capitalization
ratio generally indicate lower risk for the investors.
Note
Capitalization ratio is also known as capitalization structure ratio.

Financial Ratios for Executives

Cash conversion cycle (CCC)
Type: Liquidity measure
Formula
CCC = Days in + Days sales - Days payable
inventory outstanding outstanding
Description
The cash conversion cycle indicates the number of days that a company’s cash is
tied up in the production and sales process of its operations. The shorter the
cycle, the more liquid the company’s working capital is.
Example
ABC Company has currents days in inventory of 43.25 days, days sales outstanding of 48.72, and a days payable outstanding of 41.34 days. This gives a
cash conversation cycle (CCC) of 50.63 days.
Cash conversion cycle = 43.25 + 48.72 - 4134
. = 50.63 days
The higher the CCC, the longer it takes for the company to convert its inventory and credit sales into cash. An increase in the CCC could be an indication
of one or all of the following:
• The company has a large amount of old or slow moving
inventory that eventually will need to be written off.
• The customers are not paying as quickly as they have
done in the past. This could lead to an increase in reserve
for bad debt or possibly an expense for bad debt.
• Days payable outstanding has decreased as a result
of the company paying its bills earlier than they have in
the past.

23

24

Chapter 2 | Ratios Description

Cash flow per share
Type: Profitability measure
Formula
Cash flow per share =

Operating cash flow - Preferred dividend
Shares outstanding

Description
The cash flow per share ratio is very similar to earnings per share, but this ratio
uses cash instead of earnings. Earnings can theoretically be manipulated from
quarter to quarter more easily than cash can. Thus, tracking cash flow per
share can show a better picture of what is going on with the company.
Some financial analysts place more emphasis on cash flow than earnings as a
measure of the company’s financial situation.
Example
ABC Company has operating cash flow in the amount of $8,145. There are no
preferred shares in ABC Company; thus, there is no preferred dividend. Total
number of shares outstanding amounts to 10,000. This gives a cash flow per
share of $0.81 as of December 31, 2013.
Cash flow per share =

8,145 - 0
= 0.81
10, 000

This number can be compared to industry averages or other companies in the
same industry to compare operational effectiveness at generating cash.

Financial Ratios for Executives

Cash flow to debt ratio
Type: Debt measure
Formula
Cash flow to debt ratio =

Operating cash flow
Total debt

Description
The cash flow to debt ratio indicates the company’s ability to cover total debt
with its annual cash flow from operations. A high cash flow to debt ratio puts
the company in a strong position to cover its total debt.
Example
ABC Company has cash flow from operations in the amount of $8,145 and
total debt (short term and long term) in the amount of $22,005. This gives a
cash flow to debt ratio of 0.37.
Cash flow to debt ratio =

8,145
= 0.37
22, 005

A cash flow to debt ratio of 0.37 indicates that it will take the company over
three years (i.e., 3.7 times) to cover its total debt. This number can be compared to industry averages or other companies to compare debt loads.

25

26

Chapter 2 | Ratios Description

Cash ratio
Type: Liquidity measure
Formula
Cash ratio =

Cash and cash equivalent
Current liabilities

Description
The cash ratio measures the company’s liquidity. It further refines both the
current ratio and the quick ratio by measuring the amount of cash and cash
equivalents there are in current assets to cover current liabilities.
Example
ABC Company has cash and cash equivalents in the amount of $16,450 and
current liabilities in the amount of $28,500. This gives a cash ratio of 0.58.
Cash ratio =

16, 450
= 0.58
28, 500

This number can be compared to industry averages or other companies to
compare liquidity.
This means that the company can pay off 58% of its current liabilities without
generating additional cash.

Financial Ratios for Executives

Collection period
Type: Performance measure
Formula
Collection period =

Days ´ Account receivable
Credit sales

Description
The collection period indicates the amount of time (in days) that it takes a company to convert its receivables into cash.
Example
ABC Company has accounts receivable in the amount of $28,030 and credit
sales in the amount of $210,000. In this example, credit sales and total sales
are identical. This gives a collection period of 48.72 days, which means that it
takes a little over one and a half months for the company to convert credit
sales into cash.
Collection period =

365 ´ 28, 030
= 48.72 days
210, 000

The company’s credit terms will have a significant impact on the average collection period: the better the credit terms, the higher the average collection
period. An increase in the collection period could indicate increased risk of
the company’s customers not being able to pay for their purchases. A possible
result is that the company will have to hold greater levels of current assets
as a reserve for potential losses or bad debt expense. Most large companies
(nonretail) do not handle many cash sales. Therefore, when looking at financial
statements; it can be assumed that total sales do not include any cash sales.
However, in smaller companies and in retail businesses, cash sales can be a
significant part of the total sales.
Note
Collection period is also known as the average collection period or as days
sales outstanding.

27

28

Chapter 2 | Ratios Description

Compound annual growth rate (CAGR)
Type: Other
Formula

(

CAGR = (Ending value / Starting value )

1/( number of periods )

) -1

Description
The compound annual growth rate shows the average year over year growth
rate for a given period. Compound annual growth rate over a given period is
always a better indication than the use of a single year’s change.
CAGR also eliminates spikes and drops (especially for companies that are
very seasonal in nature) during the selected period and a good tool when
comparing different companies growth rates.
Example
ABC Company has the following annual sales between 2011 and 2013, which
means that there are two growth periods e.g., 2011 to 2012 is one growth
period and 2012 to 2013 is another growth period:
2011 Sales: $175,182
2012 Sales: $203,700
2013 Sales: $210,000
CAGR =

((210, 000 / 175,182) ) - 1 = 0.0949
(1/2 )

The compound annual growth rate shows that the company’s sales have
increased 9.49% annually from 2011 to 2013.
To calculate the compound annual growth rate in Excel, the following formula
can be typed into the formula bar:
=((210000/175182)^(1/2))-1)

Financial Ratios for Executives

Contribution margin
Type: Cost accounting
Formula
Contribution margin = Sales - Variable cost
Description
The contribution margin is the difference between sales and variable cost. The
contribution margin can be calculated for the company as a whole or by product group or by individual units. The contribution margin shows the amount
available to cover fixed cost and profit.
Example
XYZ Company is considering investing in a new production unit that costs
$1,000,000 to support increased demands in sales. The fixed cost for the new
unit is $200,000 annually. The new production unit can produce 240,000 units
annually. The company expects to sell 135,000 units the first year at a sales
price of 4.75 per unit, generating total sales of $641,250. The variable cost
of each unit is $1.50 amounting to $202,500 in annual variable cost. This
results in a contribution margin of $438,750 and a contribution margin ratio
of 0.68%.
Contribution margin = 641, 250 - 202, 500 = 438, 750
A
1
2
3
4
5
6
7

B

C

Description
Units
Sales
135,000
Variable cost
135,000
Contribution margin
135,000
Contribution margin ratio

D

F

Price
4.75
1.50
3.25

Total
641,250
202,500
438,750
0.68

I

This means that the company has $438,750 to cover fixed cost and profit.

29

30

Chapter 2 | Ratios Description

Contribution margin ratio
Type: Cost accounting
Formula
Contribution margin ratio =

Sales - Variable costs
Sales

Description
The contribution margin ratio shows the percentage of sales available to cover
fixed costs and profit. The contribution margin ratio can be calculated for the
company as a whole or by product group or by individual units.
Example
XYZ Company is considering investing in a new production unit that costs
$1,000,000 to support the increased demands in sales. The fixed cost for the
new unit once installed is $200,000 annually. The new production unit can
produce 240,000 units annually. The company expects to sell 135,000 units
the first year at a sales price of 4.75 per unit, generating total sales of $641,250.
The variable cost of each unit is $1.50 amounting to $202,500 in annual variable cost. This results in a contribution margin of $438,750 and a contribution
margin ratio of 0.68%.
Contribution margin ratio =
A
1
2
3
4
5
6
7

B

641, 250 - 202, 500
= 0.68
641, 250
C

Description
Units
Sales
135,000
Variable cost
135,000
Contribution margin
135,000
Contribution margin ratio

D

F

Price
4.75
1.50
3.25

Total
641,250
202,500
438,750
0.68

I

This means that each dollar of sales generates $0.68 to cover fixed cost and
profit.

Financial Ratios for Executives

Cost of capital (Weighted average cost of
capital or WACC)
Type: Other
Formula
WACC = Wd ´ R d ´ (1 - Tax rate ) + Wps ´ R ps + Wcs ´ R cs
Description
The cost of capital, also known as weighted average cost of capital or WACC,
measures the company’s average costs of financing. Companies have many
sources of capital, mostly debt and equity.
WACC measures the weighted average cost of these two sources. This rate is
most often used in capital allocation for evaluating future projects. In general,
all projects that the company takes on should yield a return greater that the
weighted average cost of capital.
Example
ABC Company has total debt in the amount of $79,930. The weight of the
company’s financing is 61% debt and 39% equity, the rate of which is financed
at 7% and 13%, respectively. The company’s effective tax rate is 22%. Tax rate
used in the calculation should be the company’s effective tax rate and not the
statutory rate.
This gives a weighted average cost of capital in the amount of 8.40%. Projects
that are not expected to return greater than 8.40% would generally be declined
unless they show some other noneconomic benefit to the company.
WACC = 0.61´ 0.07 ´ (1 - 0.22 ) + 0 ´ 0 + 0.39 ´ 0.13 = 8.4 0%
Note
Wd, Wps, and Wcs are the weights (percentages) used for debt, preferred, and
common shares, respectively. Rd, Rps, and Rcs are the (interest) rates for debt,
preferred, and common shares. Note that ABC Company has no preferred
shares.

31

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Chapter 2 | Ratios Description

Current ratio
Type: Liquidity measure
Formula
Current ratio =

Current assets
Current liabilities

Description
The current ratio indicates the extent to which current liabilities can be “covered” by current assets. Current assets include inventory, accounts receivable,
cash, and securities. Current liabilities include accounts payable, short-term
notes, current portion of long term debt, and accrued expenses.
Example
ABC Company has currents assets in the amount of $69,765 and current
liabilities in the amount of $28,500. This gives a current ratio of 2.45.
Current ratio =

69, 765
= 2.45
28, 500

Thus, the company has almost two and a half times more current assets than
current liabilities. This number is useful for comparison with industry trends
but includes so many items from the financial statements that a deeper dive is
often required to determine if a ratio is “good.”
For example, a company using a just-in-time inventory system may have low
inventory, making their current ratio lower but not necessarily indicating that
there is a problem with meeting short-term obligations. Likewise, a company
with bloated inventory may have a high current ratio and still have problems
meeting short-term obligations.

Financial Ratios for Executives

Current yield (dividend yield)
Type: Profitability measure
Formula
Current yield =

Dividend per share
Price per share

Description
The current yield, also known as dividend yield, is a measure of an investment’s
return. The higher the current yield, the higher the return on the investment.
Typically, only profitable companies pay out dividends; therefore, investors
often view companies that have paid out significant dividends for an extended
period of time as a less risky investment.
Example
ABC Company has paid out dividend per share in the amount of $0.30 and
has a share price at the end of the year in the amount of $6.15 per share. This
gives a current yield in the amount of 4.87%, which means that the investor
has earned 4.87% return if he has paid $6.15 for each share purchased.
Current yield =

0.30
= 4.87 %
6.15

The term “yield” is often used in different situations to mean different things.
Because of this, yields from different investments should not necessarily be
compared as if they were all equal.
Note
The current yield is also known as dividend yield.

33

34

Chapter 2 | Ratios Description

Days in inventory (Days inventory
outstanding)
Type: Performance ratio
Formula
Days in inventory =

Inventory
Cost of sales / 365

Description
The days in inventory ratio measures the average number of days the company
holds its inventory before selling it to customers.
Example
ABC Company has inventory in the amount of $28,875 and cost of sales in
the amount of $163,000. This gives days in inventory of 55.70 days.
Days in inventory =

24 , 875
= 55.7 0 days
163, 000 / 365

This means that ABC Company holds its inventory for an average of 55.70 days
before their products are sold to customers. This number can be compared
to the industry average, to other companies, or trended over time to see how
a company is doing managing inventory.
The lower the number of days in inventory, the better the position of the
company as cash is not tied up in inventory.
Note
Days in inventory is also known as days inventory outstanding and inventory
conversion period.

Financial Ratios for Executives

Days inventory outstanding (Days in
inventory)
Type: Performance measure
Formula
Days inventory outstanding =

Inventory
Cost of sales / 365

Description
The days inventory outstanding ratio measures the average number of days that
the company holds its inventory before selling it to customers.
Example
ABC Company has inventory in the amount of $28,875 and cost of sales
in the amount of $163,000. This gives an inventory outstanding ratio of
55.70 days.
Days inventory outstanding =

24, 875
= 55.7 0 days
163, 000 / 365

This means that ABC Company holds its inventory for an average of 55.70 days
before their products are sold to customers. This number can be compared
to the industry average, to other companies, or trended over time to see how
a company is doing managing inventory.
The lower the number of days inventory outstanding the better the position
of the company as cash is not tied up in inventory.
Note
Days inventory outstanding is also known as days in inventory and inventory
conversion period.

35

36

Chapter 2 | Ratios Description

Days payable (Payable period)
Type: Performance measure
Formula
Days payable =

Accounts payable
Cost of sales / 365

Description
The days payable ratio, also known as payable period, measures a company’s
average number of days between receiving goods and paying its suppliers for
them. The greater the payable period, the greater number of days it takes the
company to pay its suppliers.
Example
ABC Company has accounts payable in the amount of $18,460 and credit
purchase per day in the amount of $163,000. This gives days payable of
41.33 days.
Days payable =

18, 460
= 4133
. days
163, 000 / 365

Days payable ratio of 41.33 means that the company pays its suppliers 41.33 days
after receiving the products. The days payable period is a reflection of the
credit terms that are extended to the company by its supplier. In general, a
ratio much higher than the industry average could mean that the company has
liquidity problems and that the company is not paying its suppliers in a timely
manner.
A decline in the payable period could be an indication of change in credit
terms or an indication that the company has issues with its cash management.
This number can be compared to the industry average, to other companies, or
trended over time to see how a company is doing with payables. This number
can also be compared to known payment terms to see if the company is paying on time.

Financial Ratios for Executives

Days sales in cash
Type: Performance measure
Formula
Days sales in cash =

Cash and securities
Annual sales / 365

Description
The days sales in cash ratio is a measure of management’s control over cash
balances. Generally, the more days sales in cash, the better the company’s cash
position, however, too many assets sitting in cash is not necessarily a good
thing, either.
Example
ABC Company has cash and securities in the amount of $16,730 and annual
sales in the amount of $210,000. This gives an average days sales in cash period
of 29.08 days. This number can be compared to the industry average, to other
companies, or trended over time to see how a company is managing cash.
Days sales in cash =

16, 730
= 29.08 days
210, 000 / 365

Companies require a certain amount of cash for to make timely payments
for its operations, i.e., vendor payments, payroll, etc. Companies with debt on
its books may also have debt covenants that require them to have a certain
amount on cash available.

37

38

Chapter 2 | Ratios Description

Days sales outstanding (DSO)
Type: Performance measure
Formula
Days sales outstanding =

Days ´ Account receivable
Credit sales

Description
The days sales outstanding, also known as the average collection period, indicates the amount of time in days that it takes a company to convert its receivables into cash.
Example
ABC Company has accounts receivable in the amount of $28,030 and credit
sales in the amount of $210,000. In this example, credit sales and total sales
are identical. This gives days sales outstanding of 48.72 days, which means that
it takes a little over one and a half months for the company to convert credit
sales into cash.
Days sales outstanding =

365 ´ 28, 030
= 48.72 days
210, 000

The company’s credit terms will have a significant impact on the average collection period: the better the credit terms, the higher the average collection
period. An increase in days sales outstanding could indicate increased risk of
the company’s customers not being able to pay for their purchases. A possible
result is that the company will have to reserve for potential losses or expense
bad debt. Most large companies (nonretail) do not handle many cash sales.
Therefore, when looking at financial statements, it can be assumed that total
sales do not include any cash sales. However, in smaller companies and in retail
businesses, cash sales can be a significant part of the total sales.
Note
Days sales outstanding is also known as average collection period or collection period.

Financial Ratios for Executives

Debt to assets
Type: Debt measure
Formula
Debt to assets =

Total debt
Total assets

Description
The debt to assets ratio, also known as the debt ratio or debt to capital, shows
the proportion of a company’s total debt relative to its assets. This measure
gives an idea as to the leverage of the company along with the potential risks
the company faces in terms of its debt-load.
Example
ABC Company has total debt (total liabilities) in the amount of $79,930 and
total assets in the amount of $132,000. This gives a debt to asset ratio of 0.61.
This means that 61% of the company’s assets are financed by the creditors and
debt, and therefore 39% is financed by the owners (equity). A higher percentage indicates more leverage and more risk.
Debt to assets =

79, 930
= 0.61
132, 000

The amount of leverage, that is, debt that is right for the company varies
based on the industry in which the company operates and the maturity of the
company as well as other factors. What is optimal for one company might not
be right for another. However, lower debt and higher equity levels generally
indicate lower risk for the investors. The debt to asset ratio can be compared
to the industry average, to other companies, or trended over time to see how
a company is doing managing its debt.
Note
Debt to assets is also known as debt ratio or debt to capital.

39

40

Chapter 2 | Ratios Description

Debt to capital ratio
Type: Debt measure
Formula
Debt to capital =

Total liabilities
Total liabilities + book value of equity

Description
The debt to capital ratio, also known as debt ratio or debt to asset ratio, shows
the proportion of a company’s total debt relative to its assets. This measure
gives an idea as to the leverage of the company along with the potential risks
the company faces in terms of its debt-load.
Example
ABC Company has total debt (total liabilities) in the amount of $79,930 and
total assets in the amount of $132,000. This gives a debt to capital ratio of
0.61. This means that 61% of the company’s assets are financed by the creditors and debt, and therefore 39% is financed by the owners (equity). A higher
percentage indicates more leverage and more risk.
Debt to capital =

79, 930
= 0.61
79, 930 + 52, 07 0

The amount of leverage, that is, debt that is right for the company varies based
on the industry in which the company operates and the maturity of the company as well as other factors. What is optimal for one company might not be
right for another. However, lower debt and higher equity levels generally indicate lower risk for the investors. The debt to capital ratio can be compared
to the industry average, to other companies, or trended over time to see how
a company is doing managing its debt.
Note
Debt to capital is also known as debt ratio or debt to asset.

Financial Ratios for Executives

Debt ratio
Type: Debt measure
Formula
Debt ratio =

Total liabilities
Total assets

Description
The debt ratio, also known as debt to asset ratio or debt to capital ratio, shows
the proportion of a company’s total debt relative to its assets. This measure
gives an idea as to the leverage of the company along with the potential risks
the company faces in terms of its debt-load.
Example
ABC Company has total liabilities in the amount of $79,930 and total assets in
the amount of $132,000. This gives a debt ratio of 0.61. This means that 61%
of the company’s assets are financed by the creditors and debt, and therefore
39% is financed by the owners (equity). A higher percentage indicates more
leverage and more risk.
Debt ratio =

79, 930
= 0.61
132, 000

The amount of leverage, that is, debt that is right for the company varies
based on the industry in which the company operates and the maturity of
the company as well as other factors. What is optimal for one company might
not be right for another. However, lower debt and higher equity levels generally indicate lower risk for the investors. The debt ratio can be compared to
the industry average, to other companies, or trended over time to see how a
company is doing managing its debt.
Note
Debt ratio is also known as debt to assets or debt to capital ratio.

41

42

Chapter 2 | Ratios Description

Debt to equity
Type: Debt measure
Formula
Debt to equity =

Total liabilities
Total equity

Description
The debt to equity measures how much of the company is financed by its
debt holders compared with its owners and is another measure of financial
health. A company with a large amount of debt will have a very high debt to
equity ratio, whereas one with little debt will have a low debt to equity ratio.
Companies with lower debt to equity ratios are generally less risky than those
with higher debt to equity ratios.
Example
ABC Company has total liabilities in the amount of $51,430 and equity in the
amount of $52,070. This gives a debt to equity ratio of 0.98.
Debt to equity =

51, 430
= 0.98
52, 07 0

A debt to equity ratio of 0.98 is not uncommon. However, there is no specific
optimal capital structure for a company. What is optimal for one company
might not be right for another. There needs to be a balance between debt and
equity financing. Debt financing typically offers the lowest rate. However, too
much debt financing is rarely the optimal structure, as debt has to be paid back
even when the company is going through troubled times.

Financial Ratios for Executives

Dividend payout ratio
Type: Market value measure
Formula
Dividend payout ratio =

Annual dividend per share
Earnings per share

Description
The dividend payout ratio shows the percentage of earnings paid to shareholders in dividends and how well earnings support the dividend payments. More
mature companies tend to have a higher payout ratio compared to growth
companies. This is because growth companies can provide a higher return
on investment by using the cash (dividend) to invest in the growth of the
company.
Example
ABC Company has a dividend per share in the amount of $0.30 and earnings
per share in the amount of $0.95. This gives a dividend payout ratio of 31.57%,
which means that ABC Company paid 31.57% of its net income to its shareholders in form of dividend.
Dividend payout ratio =

0.30
= 3157
. %
0.95

Dividend payout ratio can also be calculated as dividends divided by net
income. In this example, using the data from ABC Company, it would have
been 3,000 / 9,475 = 31.57%.
This number can be compared to the industry average or to other companies
to evaluate potential investments.

43

44

Chapter 2 | Ratios Description

Dividend per share
Type: Market value measure
Formula
Dividend per share =

Dividend
Shares outstanding

Description
The dividend per share ratio measures the profit distribution paid out on a per
share basis to the company’s shareholders. Most companies have a dividend
payout policy; however, not all companies pay out an annual dividend. Growth
companies would typically not pay out any dividend early on, whereas more
mature companies typically pay out dividends. This is because growth companies can provide a higher return on investment, by using the cash (dividend) to
invest in the growth of the company.
Example
ABC Company has paid out dividend in the amount of $3,000 based on a
total number of outstanding shares of 10.000. This gives a dividend per share
of 0.30 dollars.
Dividend per share =

3, 000
= 0.30
10, 000

A company with a year over year growth in the dividend per share is a positive sign that the company believes that the growth can be sustained. The
growth in the dividend payout will also reflect positively on the company’s
share price.
This number can be compared to the industry average or to other companies
to evaluate potential investments.

Financial Ratios for Executives

Dividend yield (Current yield)
Type: Profitability measure
Formula
Dividend yield =

Dividend per share
Price per share

Description
The dividend yield, also known as current yield, is a measure of an investment’s return. The higher the dividend yield, the higher the return on the
investment.
Typically, only profitable companies pay out dividends; therefore, investors
often view companies that have paid out significant dividends for an extended
period of time as a less risky investment.
Example
ABC Company has paid out dividend per share in the amount of $0.30 and
has a share price at the end of the year in the amount of $6.15 per share. This
gives a dividend yield in the amount of 4.87%, which means that the investor
has earned 4.87% return if he has paid $6.15 for each share purchased.
Dividend yield =

0.30
= 4.87 %
6.15

The term yield is often used in different situations to mean different things.
Because of this, yields from different investments should not necessarily be
compared as if they were all equal.
Note
The dividend yield is also known as current yield.

45

46

Chapter 2 | Ratios Description

DuPont ratio
Type: Profitability measure
Formula
ROE = Profit margin x Total asset turnover x Equity multiplier
ROE =

Net income
Total assets
Sales
x
x
Sales
Total assets
Equity
ROE =

Net income
Equity

Description
The DuPont ratio is an expression that breaks return on equity (ROE) into its
three components to give a total picture of how the company is performing. In
the DuPont formula, ROE is defined as profit margin multiplied by total asset
turnover and the equity multiplier. When someone says “DuPont ratio” and
you instantly think “margin-turn-leverage,” you are doing pretty well. What is
important are the components, not necessarily the final number. Two companies might have the exact same ROE, but their components could be very
different, showing you different business strategies.
Example
ROE = 0.05 x 159
. x 2.54 = 0.18
ROE =

9, 475
210, 000 132, 000
x
x
= 0.18
210, 000 132, 000 52, 07 0
ROE =

9.475
= 0.18
52, 07 0

Note
The DuPont Corporation started using this formula in the 1920s, hence the
name.

Financial Ratios for Executives

Earnings before interest and taxes (EBIT)
Type: Performance measure
Formula
EBIT = Sales - Operating expenses
Description
The earnings before interest and taxes, also known as profit before interest &
taxes (PBIT), is equivalent to net income with interest and taxes added back.
EBIT is an indicator of the company’s financial performance and provide investors useful information for evaluating different companies without regard to
interest expenses or tax rates. By dropping interest and taxes from earnings,
you normalize for companies with different capital structure and tax rates
resulting in “apples-to-apples” comparisons.
Example
ABC Company has sales in the amount of $210,000 and operating expenses
in the amount of $196,475. This amounts to $13,525 of EBIT.
EBIT = 210, 000 - 196, 475 = 13, 525
This number can be compared to other companies to evaluate potential
investments, or to evaluate general profitability. EBIT is often included as a
component of other ratio calculations such as basic earnings power, NOPAT,
and times interest earned.
Note
EBIT, although not a measure defined by accounting principles generally
accepted in the United States, is a financial performance indicator often used
by management.

47

48

Chapter 2 | Ratios Description

Earnings before interest, taxes, depreciation
and amortization
Type: Performance measure
Formula
EBITDA = EBIT + Depreciation + Amortization
Description
The earnings before interest, taxes, depreciation, and amortization (EBITDA)
although not a measure defined by accounting principles generally accepted in
the United States, is a financial performance indicator often used by management. EBITDA is like EBIT but further eliminates depreciation and amortization
(noncash expenses). Thus, EBITDA makes for “apples-to-apples” comparisons
for companies by eliminating capital structure, taxes, and depreciation and
amortization schedule differences.
Example
ABC Company has EBIT in the amount of $13,525 and depreciation and amortization in the amount of $100 and $375, respectively. This gives an EBITDA
of $14,000.
EBITDA = 13, 525 + 100 + 375 = 14 , 000
This number can be compared to other companies to evaluate potential
investments, or to evaluate general profitability. EBITDA is often used in other
ratio calculations and can often be found in the footnotes to the financial
statements.
Some companies also use an adjusted EBITDA, a supplemental measure in
evaluating the performance of the company’s business. Adjusted EBITDA eliminates nonrecurring items from the calculation such as impairment of assets,
write-off of goodwill, and so on. EBITDA and adjusted EBITDA often provide
investors with better information in respect to a company’s operations and
financial condition.

Financial Ratios for Executives

EBIT
Type: Performance measure
Formula
EBIT = Sales - Operating expenses
Description
EBIT means earnings before interest and taxes, also known as profit before interest
& taxes (PBIT) and is equivalent to net income with interest and taxes added
back. EBIT is an indicator of the company’s financial performance and
provide investors useful information for evaluating different companies
without regard to interest expenses or tax rates. By dropping interest and
taxes from earnings, you normalize for companies with different capital structure and tax rates resulting in “apples-to-apples” comparisons.
Example
ABC Company has sales in the amount of $210,000 and operating expenses
in the amount of $196,475. This amounts to $13,525 of EBIT.
EBIT = 210, 000 - 196, 475 = 13, 525
This number can be compared to other companies to evaluate potential
investments, or to evaluate general profitability. EBIT is often included as a
component of other ratio calculations such as basic earnings power, NOPAT,
and times interest earned.
Note
EBIT, although not a measure defined by accounting principles generally
accepted in the United States, is a financial performance indicator often used
by management.

49

50

Chapter 2 | Ratios Description

EBITDA
Type: Performance measure
Formula
EBITDA = EBIT + Depreciation + Amortization
Description
EBITDA means earnings before interest, taxes, depreciation, and amortization.
Although not a measure defined by accounting principles generally accepted
in the United States, is a financial performance indicator often used by management. EBITDA is like EBIT but further eliminates depreciation and amortization (noncash expenses). Thus, EBITDA makes for “apples-to-apples”
comparisons for companies by eliminating capital structure, taxes, and depreciation and amortization schedule differences.
Example
ABC Company has EBIT in the amount of $13,525 and depreciation and amortization in the amount of $100 and $375, respectively. This gives an EBITDA
of $14,000.
EBITDA = 13, 525 + 100 + 375 = 14 , 000
This number can be compared to other companies to evaluate potential
investments, or to evaluate general profitability. EBITDA is often used in other
ratio calculations and can often be found in the footnotes to the financial
statements.
Some companies also use an adjusted EBITDA, a supplemental measure in
evaluating the performance of the company’s business. Adjusted EBITDA eliminates nonrecurring items from the calculation such as impairment of assets,
write-off of goodwill, and so on. EBITDA and adjusted EBITDA often provide
investors with better information in respect to a company’s operations and
financial condition.

Financial Ratios for Executives

EBITDA to interest coverage
Type: Debt measure
Formula
EBITDA to interest coverage =

EBITDA
Interest payments

Description
The EBITDA to interest coverage ratio this ratio gives a measure of how much
leverage a company can sustain. By eliminating the noncash depreciation and
amortization expenses, it gives a truer sense of how much cash the company
will have to cover interest payments. The lower the ratio, the higher the likelihood that the company will not be able to service their debts, that is, pay
interest expenses on its debt.
Example
ABC Company has EBITDA in the amount of $14,000 and interest expenses
in the amount of $1,190. This gives an EBITDA to interest coverage ratio in
the amount of 11.76, which means that the company has earnings more than
11 times its interest expense.
EBITDA to interest coverage =

14 , 000
= 1176
.
119
, 0

An EBITDA to interest coverage ratio of 11.76 provides sufficient coverage
and indicates that the company will be able to service its debt. This number
can be compared to other companies to evaluate potential investments or
company performance relative to peer firms.

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Chapter 2 | Ratios Description

Earnings per share (EPS)
Type: Market value measure
Formula
EPS =

Net income - Dividend on preferred shares
Average outstanding shares

Description
The earnings per share ratio shows the portion of a company’s profit allocated
to each outstanding share of common stock. Earnings per share serve as an
indicator of a company’s profitability.
Example
In 2013, ABC Company had net income in the amount of $9,475 and total
number of outstanding shares of 10,000. This gives earnings per share of
$0.95, which means that the company generates net income of $0.95 for each
outstanding share.
EPS =

9, 475 - 0
= 0.95
10, 000

Generally, the higher the earnings per share the better a company is doing
for the shareholders. An increase in EPS year over year is typically a sign of a
growth or a mature company. Some companies buy back shares to improve
earnings per share without necessarily increasing net income. It is therefore
important to not only look at EPS in isolation but to compare EPS to the total
number of shares outstanding.

Financial Ratios for Executives

Economic value added (EVA)
Type: Performance measure
Formula
EVA = Total net operating capital ´ (ROIC - WACC )
Description
The economic value added measures a company’s true profitability. That is, its
ability to generate returns in excess of the return required by investors. If EVA
is positive the company has created value for its shareholders. If EVA is negative, shareholder value has been destroyed.
Example
ABC Company has total net operating capital in the amount of $99,605, return
on invested capital of 12.44% and WACC of 8.40%. This gives economic value
added in the amount of $4,024.
EVA = 99, 605 ´ ( 0.1244 - 0.084 0 ) = 4 , 024
This positive EVA can be interpreted as healthy, but it can also be compared
to the EVA of other companies in a similar industry, or compared to the EVA
of other potential investments.
Note
ROIC and WACC are explained elsewhere in this book.

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Chapter 2 | Ratios Description

Effective tax rate
Type: Profitability measure
Formula
Effective tax rate =

Tax expense
Earnings before tax

Description
The effective tax rate explains the various rates at which a company’s income
is taxed as a result of different tax jurisdictions both domestically and internationally. Companies also employ strategies to minimize tax. To compute
the effective (or average for the year) tax rate, total tax expense is divided by
earnings before tax.
Example
ABC Company has total tax expenses for the year in the amount of $2,970
and earnings before tax in the amount of $12,445. This gives an effective tax
rate of 23.86%.
Effective tax rate =

2, 97 0
= 23.86%
12, 445

This number can be compared to other companies’ effective tax rates to
evaluate the tax strategies of the company. If, for example, you were Coke
and you saw that Pepsi had a lower effective tax rate, you would want to do a
deeper dive and find out why.
Note
Companies with significant lower than average tax rate compared to other
companies in its industry might be very aggressive on their tax strategies.
This could pose a risk of tax exposure in the form of a tax audit with reversal
of the chosen tax treatment and could also result in tax penalties and
other fees.

Financial Ratios for Executives

Enterprise value (EV)
Type: Market value measure
Formula
EV = Market + Debt + Minority + Preferred - Cash and
cap
interest
shares
cash
equivalents
Description
The enterprise value is a measure of a company’s value as a functioning entity,
often used as an alternative to straightforward market capitalization. If you
were to purchase (buy out) a firm, you would start with its enterprise value
and work from there to determine your offer. Thus, you can see why cash is
subtracted because you would get that cash in the deal to offset what you are
buying, debt and equity.
Example
ABC Company has a market cap of $61,500, debt in the amount of $22,005,
and cash and cash equivalents amounting to $16,450. The company does not
have any minority interest or any preferred shares. This gives an enterprise
value of $67,055.
EV = 61, 500 + 22, 005 + 0 + 0 - 16, 450 = 67 , 055
Note
Calculating the enterprise value for public companies are relatively easy as the
market cap—that is, the number of shares times the company’s share price—
is publicly available. Calculating the enterprise value for private companies
are for the same reason not that easy as there is no public market for the
company’s stock. A common approach to valuing equity of a private company
is to compare the entity to similar companies, that is, industry, debt structure,
results, and growth opportunities, which are public traded.

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Chapter 2 | Ratios Description

Equity multiplier
Type: Debt measure
Formula
Equity multiplier =

Total asset
Shareholder equity

Description
The equity multiplier, also known as assets to equity ratio, gives a sense of how
much of the total assets of a company are really owned by shareholders as
compared to those that are financed by debt. Some businesses thrive more on
borrowing money (leverage) than other companies. High assets to equity may
be good for them. However, there is always some point for any company for
which their assets are overleveraged. That can be dangerous to the shareholders and their equity (e.g., Lehman Brothers was so overleveraged in 2007 that
their assets to equity was 31! Calls on their debt in 2008 more than wiped
out the shareholders).
Example
ABC Company has total assets in the amount of $132,000 and shareholder
equity in the amount of $52,070. This gives an equity multiplier of 2.54. Thus,
the business has $2.54 of assets for every dollar of shareholder equity.
Equity multiplier =

132, 000
= 2.54
52, 07 0

Note
Debt financing typically offers a lower rate compared to equity. However, too
much debt financing is rarely the optimal structure as debt has to be paid back
even when the company is going through troubled times.

Financial Ratios for Executives

Exercise value
Type: Other
Formula
Exercise value = Current price of stock - Strike price
Description
The exercise value is the value of an option if it is exercised today. For a call
option, this is the difference between the current stock price and the strike
price. The strike price, also known as the exercise price, is the current market
value price.
Example
As part of his compensation, an ABC employee received 1,000 stock options
with a strike price of $5.68. The shares are fully vested and can be exercised
at any given time.
Exercise value = 6.15 - 5.68 = 0.47
Assuming that the employee wants to sell these shares on December 31
when the price per share is $6.15, the employee would receive cash in the
amount of $0.47 per share amounting to $470.
Cash payout = Number of shares ´ Exercise value
Cash payout = 1,000 ´ 0.47 = $470.00

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Chapter 2 | Ratios Description

Fixed assets turnover
Type: Performance measure
Formula
Fixed assets turnover =

Sales
Total fixed assets

Description
The fixed assets turnover measures how effectively the company uses its assets
to generate sales. The higher the ratio, the better the company is at generating
sales from its assets.
The fixed assets typically include property, plant, and equipment. Other assets
such as goodwill, deferred taxes, and other nonproperty, plant, and equipment
items are typically excluded to provide a more meaningful and comparative
ratio. In most cases, these assets are not directly involved in generating sales
and are therefore excluded.
Example
ABC Company has sales in the amount of $210,000 and total fixed assets in
the amount of $32,620, which gives a fixed asset turnover ratio of 6.44. This
means that for each dollar invested in fixed assets the company is generating
$6.44 of sales.
Fixed assets turnover =

210, 000
= 6.44
32, 620

Fixed asset turnover varies significantly from industry to industry. For example, a manufacturing company will have a much lower fixed asset turnover
compared to a service company with little to no assets. It is therefore important to compare the ratio with comparable companies. A sudden decline in
the fixed asset turnover ratio could be an indication that that the company
has recently invested significantly in fixed assets. A decline could also indicate
that the company has sold fixed assets or fully depreciated assets without
acquiring new assets.

Financial Ratios for Executives

Free cash flow (FCF)
Type: Cash flow measure
Formula
Free cash flow = NOPAT - Net investment in operating capital
Description
The free cash flow shows the cash flow available for distribution after the company has made all investments in fixed assets and working capital necessary to
sustain ongoing operations.
Net investment in operating capital is calculated by subtracting the previous
year’s total net operating capital from the current year’s total net operating
capital.
Example
ABC Company has NOPAT in the amount of $10,298 and capital expenditure
in the amount of $5,165. This gives a free cash flow of $5,133 as of December
31, 2013.
Free cash flow = 10, 298 - 5,165 = 5,133
This means that ABC Company could distribute $5,133 to its shareholders
while sustaining their ongoing operations.
Note
NOPAT is calculated elsewhere in the book.

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Chapter 2 | Ratios Description

Gearing
Type: Debt management measure
Formula
Gearing =

Total liabilities
Total equity

Description
One of the most common debt ratios is gearing. This ratio measures how
much of the company is financed by its debt holders compared with its owners and it is another measure of financial health. A company with a large
amount of debt will have a very gearing ratio, whereas one with little debt will
have a low gearing ratio. Companies with lower gearing ratios are generally
less risky than those with higher gearing ratios.
Example
ABC Company has total liabilities in the amount of $51,430 and equity in the
amount of $52,070 this give a debt to equity ratio of 0.98.
Gearing =

51, 430
= 0.98
52, 07 0

A Gearing ratio of 0.98 is not uncommon. However, there is no specific optimal capital structure for a company. There needs to be a balance between
debt (including short- and long-term debt) and equity financing. Debt financing
typically offers the lowest rate because of its tax deductibility. However, too
much debt financing is rarely the optimal structure as debt has to be paid back
even when the company is going through troubled times.

Financial Ratios for Executives

Gordon constant growth model
Type: Market value measure
Formula
Stock value =

Expected dividend per share one year from now
Required rate of return - Growth rate in dividends

Description
The Gordon constant growth model shows the intrinsic value of a stock based
on future dividends at a constant growth rate. The model is mainly used to
determine the intrinsic value of mature companies because of the constant
growth rate component.
Example
Let’s assume that ABC Company expects the growth rate in dividends to be
5% in perpetuity. The dividend per share in 2013 was $0.30. This means that
the expected dividend per share for 2014 will be $0.315.
Stock value =

0.315
= 10.50
0.08 - 0.05

If we further assume that the investors required rate of return is 8%, then the
intrinsic value of the stock would be $10.50. Compared to the current stock
price of $6.15, this would make it a good stock in which to invest.

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Chapter 2 | Ratios Description

Gross profit margin
Type: Performance measure
Formula
Gross profit margin =

Sales - Cost of goods sold
Sales

Description
The gross profit margin measures how much gross profit is generated for each
dollar of sales. The gross profit has to cover the company’s operating expenses,
depreciation and amortization, finance cost, and taxes.
Gross profit margin will vary significantly between companies in different
industries. For example, companies with significant fixed assets will typically
have a higher gross profit margin than companies with low fixed assets such
as service companies.
Example
ABC Company has sales in the amount of $210,000 and cost of sales in the
amount of $163,000, which gives a gross profit margin of 22.38%. A gross
profit margin of 22.38% means that for each $100 of sales generated by the
company, $22.38 is gross profit to cover the company’s operating costs.
Gross profit margin =

210, 000 - 163, 000
= 22.38%
210, 000

A change in the company’s gross profit margin could be a result of price
pressure from competitors, meaning that the company maintains the current
cost structure while lowering sales prices. It could also be a result of higher
cost of sales. This could be true if goods are imported, which typically adds
another layer of expenses to the cost of sales, that is, fluctuations in foreign
currents. Often, it can also be explained with a shift in product mix. It is
therefore important to look at the gross profit margin on each product or
product line.

Financial Ratios for Executives

Horizon value (Terminal value)
Type: Other
Formula
Horizon value =

FCF ´ (1 + growth rate )
WACC - growth rate

Description
The horizon value, also known as the terminal value, shows the value of future
operations beyond the end of the forecast period. It is calculated as the present value of all future cash flows after the forecast period.
That is the period when the company expects a constant growth rate in perpetuity. Horizon value is often used in valuation models for the period beyond
which you don’t have specific financial data but expect the company to grow
at some constant rate.
Example
ABC Company has free cash flow in the amount of $5,360, WACC in the
amount of 8.4%, and an assumed constant growth rate of 3%. This gives a
horizon value in the amount of $102,237.
Horizon value =

5, 360 ´ (1 + 0.03)
8.4 % - 3.0%

= 102, 237

Note
The Horizon value is also known as the terminal value.

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Chapter 2 | Ratios Description

Interest coverage
Type: Debt measure
Formula
Interest coverage =

EBIT
Interest expense

Description
The interest coverage, also known as times interest earned (TIE), indicates the
company’s ability to pay interest on its outstanding debt and to what extent
operating income can decline before the company is unable to meet its annual
interest expenses.
The lower the ratio, the higher the likelihood that the company will not be
able to service its debt (pay interest expenses on its debt). If the interest
coverage ratio gets below 1, the company is not generating enough earnings
to service its debt.
Example
ABC Company has earnings before interest and taxes (EBIT) in the amount of
$13,525 and interest expenses in the amount of $1,190. This gives an interest
coverage ratio in the amount of 11.37, which means that the company has
earnings more than 11 times its interest expense.
Interest coverage =

13, 525
= 1137
.
119
, 0

An interest coverage ratio of 11.37 provides sufficient coverage that the company will be able to service its debt.
Note
Interest coverage is also known as time interest earned ratio.

Financial Ratios for Executives

Inventory conversion period
Type: Performance measure
Formula
Inventory conversion period =

Inventory
Cost of sales / 365

Description
The inventory conversion period measures the average number of days the company holds its inventory before selling it to customers.
Example
ABC Company has inventory in the amount of $28,875 and cost of sales in
the amount of $163,000. This gives an inventory conversion period of 55.70
days.
Inventory conversion period =

24, 875
= 55.7 0 days
163, 000 / 365

This means that ABC Company holds its inventory for an average of 55.70 days
before their products are sold to customers. This number can be compared
to the industry average, to other companies, or trended over time to see how
a company is doing managing inventory.
The lower the inventory conversation period, the better position for the company from a cash management perspective as inventory is converted faster.
Note
Inventory conversion period is also known as days inventory outstanding and
days in inventory.

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Chapter 2 | Ratios Description

Inventory turnover
Type: Performance measure
Formula
Inventory turnover =

Sales
Inventory

Description
The inventory turnover shows how many times a company’s inventory is sold
and replaced over a given period. Inventory turnover for a period can also be
calculated as cost of goods sold over ending inventory for that period.
Example
ABC Company has sales in the amount of $210,000 and inventory in the
amount of $24,875; this gives an inventory turnover ratio of 8.44.
Inventory turnover =

210, 000
= 8.44
24 , 875

COGS can also be used here to give a more accurate number but most industry publications use sales (which is inflated by the difference between retail
price and COGS).
Using the inventory at a specific time may make the ratio less accurate. For
the sake of comparison, it is better to use an average inventory, especially if
the business is seasonal in nature.

Financial Ratios for Executives

Leverage
Type: Debt measure
Formula
Leverage =

Total debt
Total equity

Description
The most well-known financial leverage ratio is the debt to equity ratio. This
leverage ratio measures how much of the company is financed by its debt
holders compared with its owners and it is another measure of financial
health. A company with a large amount of debt will have a very high debt to
equity ratio, whereas one with little debt will have a low debt to equity ratio.
Companies with lower leverage are generally less risky than those with higher
debt to equity ratios.
Example
ABC Company has total liabilities in the amount of $51,430 and equity in the
amount of $52,070; this gives a debt to equity ratio of 0.98.
Leverage =

51, 430
= 0.98
52, 07 0

A debt to equity ratio of 0.98 is not uncommon. However, there is no specific optimal capital structure for a company. There needs to be a balance
between debt and equity financing. Debt financing typically offers the lowest
rate. However, too much debt financing it is rarely the optimal structure as
debt has to be paid back even when the company is going through troubled
times.

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Chapter 2 | Ratios Description

Market capitalization (Market cap)
Type: Market value measure
Formula
Market Cap = Stock price ´ Number of shares outstanding
Description
The market capitalization (market cap), also known as market value of equity,
is the total market value of all of a company’s outstanding shares. Market cap
is calculated by multiplying the company’s shares outstanding by the current
share price. Investors often use market cap to determine a company’s size, as
opposed to sales or total asset figures.
Example
ABC Company has a stock price of $6.15 per share at December 31, 2013
and 10,000 of shares outstanding. This gives a market cap of $61,500.
Market Cap = 6.15 ´ 10, 000 = 61, 500
Note
Market capitalization is also known as market value of equity.

Financial Ratios for Executives

Market to book ratio
Type: Market value measure
Formula
Market to book =

Market price per share
Book value per share

Description
The market to book ratio, also known as price to book ratio, measures the
relative value of a company compared to its share price. The ratio can also be
calculated as total market value over total book value as the “per share” part
of the equation cancels out.
Market to book ratio is a great tool to quickly determine whether a company is
under or overvalued. If the company has a low market to book ratio, it is most
likely undervalued and could be considered a good investment opportunity.
Example
ABC Company has a share price of $6.15 at the end of the year and a book
value per share of $5.20 also at the end of the year. This gives a market to
book ratio of 1.18. This means that the company is overvalued and that the
investors are willing to pay a premium to purchase the shares. A market to
book ratio of less than 1 could indicate that the company is undervalued.
Market to book =

6.15
= 118
.
5.20

Note
Market to book ratio is also known as price to book ratio.

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Chapter 2 | Ratios Description

Market to debt ratio
Type: Market value measure
Formula
Market to debt =

Total liabilities
Total liabilities + Market value of equity

Description
The market to debt ratio is used to determine the financial strength of a company or to compare to other companies in a similar industry. A higher ratio
means that the company has more debt compared to its market value of
equity. A similar ratio, debt to capital, uses book value of equity for the same
purpose.
Example
ABC has total liabilities in the amount of $79,930 and market value of equity
in the amount of $61,500. This gives a market to debt ratio of 0.57.
Market to debt =

79, 930
= 0.57
79, 930 + 61, 500

Financial Ratios for Executives

Market value added (MVA)
Type: Market value measure
Formula
Market value added (MVA ) = Market value - Invested capital
Description
The market value added shows the difference between the market value (market cap) of a company and the capital contributed by investors (total common
equity). The higher the market value added, the more value a company has
created for shareholders. Should this number be negative, it means that investor capital has been destroyed.
Example
ABC Company has a market cap of $61,000 and invested capital in the amount
of $52,070. This gives a market value added of $9,430.
Market value added (MVA ) = 61, 500 - 52, 07 0 = 9, 430
Thus, ABC has created $9,430 in value for its investors above the capital they
have invested.
Note
Market value added differs from economic value added (EVA). Market value
added is a market value measure whereas economic value added is a performance measure, measuring the company’s true profitability.

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Chapter 2 | Ratios Description

Market value of equity
Type: Market value measure
Formula
Market value of equity = Stock price ´ Number of shares outstanding
Description
The market value of equity, also known as market cap, is the total market
value of a company’s outstanding shares. Market value of equity is calculated
by multiplying the company’s shares outstanding by the current share price.
Investors often use the market value of equity to determine a company’s size,
as opposed to sales or total asset figures.
Example
ABC Company has a stock price of $6.15 per share at December 31, 2013, and
10,000 of shares outstanding. This gives a market value of equity of $61,500.
Market value of equity = 6.15 ´ 10, 000 = 61, 500
Note
Market value of equity is also known as market capitalization or market cap.

Financial Ratios for Executives

Net cash flow
Type: Cash flow measure
Formula
Net cash flow = Net income + Depreciation + Amortization
Description
The net cash flow is the sum of net income plus noncash expenses such as
depreciation and amortization. Net cash flow shows the true cash generated
by the company.
Example
ABC Company has net income in the amount of $9,475, depreciation and
amortization in the amount of $37 and $100, respectively. This gives ABC
Company a net cash flow in the amount of $9,950.
Net cash flow = 9, 475 + 357 + 100 = 9, 950
Net cash flow can be used to judge the amount of cash a company truly has to
tap in order to invest in future growth or return to shareholders.

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Chapter 2 | Ratios Description

Net operating profit after taxes (NOPAT)
Type: Performance measure
Formula
NOPAT = EBIT ´ (1 - Tax rate )
Description
The net operating profit after taxes measures what the company’s earnings
would have been if the company had no debt and no financial assets that produce interest expenses and interest income, respectively.
Example
ABC Company has EBIT in the amount of $13,525 and an effective tax rate of
23.86%. This amounts NOPAT of $10,298.
NOPAT = 13, 525 ´ (1 - 02386 ) = 10, 298
NOPAT is a useful performance measure and a better indicator than net
income when comparing companies’ operations against one another. NOPAT
does not take into consideration the debt structure of the company nor its
financial assets.
Note
NOPAT is used in the calculation of operating cash flow.

Financial Ratios for Executives

Net operating working capital (NOWC)
Type: Performance measure
Formula
NOWC = Operating current assets - Operating current liabilities
Description
The net operating working capital measures the company’s liquidity and potential
for growth. Net operating working capital is equal to cash, accounts receivables, and inventories less accounts payable and accruals. Operating current
assets are defined as cash, receivables, and inventories. Operating current liabilities are defined as accounts payable and accruals.
Example
ABC Company has operating current assets in the amount of $69,355 and
operating current liabilities in the amount of $46,110. This gives the company
net operating working capital (NOWC) of $46,110.
NOWC = 69, 355 - 23, 245 = 46,110

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Chapter 2 | Ratios Description

Net profit margin
Type: Profitability measure
Formula
Net profit margin =

Net income
Sales

Description
The net profit margin formula looks at how much of a company’s revenues
are kept as net income. The net profit margin is generally expressed as a
percentage. Both net income and sales can be found on a company’s income
statement.
Example
ABC Company has net income in the amount of $9,475 and total sales in the
amount of $210,000. This gives a net profit margin of 4.51%, which means that
for every $100 of sales, $4.51 of net income is generated.
Net profit margin =

9, 475
= 4.51%
210, 000

Note
In some cases, in a mature market a decline in the company’s profit margin
can represent a price war, which is lowering profits. A decline in profit margins
can also be a pricing strategy in order for the company to increase its market
share.

Financial Ratios for Executives

Operating cash flow (OCF)
Type: Cash flow measure
Formula
Operating cash flow = NOPAT + Depreciation + Amortization
Description
The operating cash flow is the cash generated by the company’s everyday
business operations. It is used to determine the amount of cash normal operations are generating to see whether or not outside cash will be required to
grow the company.
Example
ABC Company has NOPAT in the amount of $10,298, depreciation in the
amount of $375, and amortization in the amount of $100. This gives the company operating cash flow (OCF) in the amount of $10,773.
Operating cash flow = 10, 298 + 357 + 100 = $10, 773
Thus, if ABC Company determined that it would need $15 million to grow the
business to the next level, they would have some sense of how much outside
cash would be needed (approximately $4.23 million).

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Chapter 2 | Ratios Description

Operating profit margin
Type: Performance measure
Formula
Operating profit margin =

EBIT
Sales

Description
The operating profit margin is a measurement of what proportion of a company’s revenue is left over after paying for variable costs of production such
as wages, raw materials, and so on. A healthy operating margin is required
for a company to be able to cover other costs such as depreciation, interest expenses, profit to shareholders, and profit to invest in the growth of
the company. Another way to look at it is that operating profit margin tells
you how good the company is at generating profits from its core business, as
opposed to all other aspects of the company.
Example
ABC Company has earnings before interest and taxes (EBIT) in the amount
of $13,525 and sales in the amount of $210,000. This gives an operating profit
margin of 6.44%.
Operating profit margin =

13, 525
= 6.44 %
210, 000

An operating profit margin of 6.44% means that for every $100 of sales, the
company generates $6.44 of EBIT. This can be compared to other companies
in the industry to see how good the company is at generating profits from
their core business, instead of other means, and how much of the operating
profit is eroded by other parts of the company.

Financial Ratios for Executives

Payable period (Days payable)
Type: Performance measure
Formula
Payable period =

Accounts payable
Cost of sales / 365

Description
The payable period ratio, also known as days payable ratio, measures a company’s average number of days between receiving goods and paying its suppliers
for them. The greater the payable period, the greater number of days it takes
the company to pay its suppliers.
Example
ABC Company has accounts payable in the amount of $18,460 and credit
purchase per day in the amount of $163,000. This gives a payable period of
41.33 days.
Payable period =

18, 460
= 4133
. days
163, 000 / 365

Payable period ratio of 41.33 means that the company pays its suppliers 41.33 days
after receiving the products. The payable period is a reflection of the credit
terms that are extended to the company by its supplier. In general, a ratio
much higher than the industry average could mean that the company has
liquidity problems and that the company is not paying its suppliers in a timely
manner.
A decline in the payable period could be an indication of change in credit
terms or an indication that the company has issues with its cash management.
This number can be compared to the industry average, to other companies, or
trended over time to see how a company is doing with payables. This number
can also be compared to known payment terms to see if the company is paying on time.

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Chapter 2 | Ratios Description

Post-money valuation
Type: Valuation
Formula
Post - money valuation =

New investment amount
New investment ownership

Description
The post-money (and pre-money) valuation are frequently used terms to
describe the valuation of a company when raising capital. When a private
equity firm, venture capitalist, or angel investor injects cash into a company
in exchange for equity (ownership), the company’s value immediately before
the investment is called pre-money valuation, whereas the company’s value
immediately after the transaction is called post-money valuation.
Example
If a venture capital (VC) firm invests $10,000,000 for 25% equity in the company, then the post-money valuation would be equal to $40,000,000.
Post - money valuation =

10, 000, 000
= 4 0, 000, 000
25%

Because the new investment amount in the company was $10,000,000, then
the pre-money valuation is equal to $30,000,000.
Pre - money valuation = 4 0, 000, 000 - 10, 000, 000 = 30, 000, 000
Note
When raising capital, valuation and the dilution of ownership is an important
issue for a business owner to understand. It is critical for the business owner
to select the right partner as often venture capital brings business expertise
and relationships in addition to capital.

Financial Ratios for Executives

Pre-money valuation
Type: Valuation measure
Formula
Pre - money valuation = Post money valuation - New investment
Description
The pre-money (and post-money) valuation are frequently used terms to
describe the valuation of a company when raising capital. When a private
equity firm, venture capitalist, or angel investor injects cash into a company
in exchange for equity (ownership), the company’s value immediately before
the investment is called pre-money valuation, whereas the company’s value
immediately after the transaction is called post-money valuation.
Example
If a venture capital (VC) firm invests $10,000,000 for 25% equity in the company, then the post-money valuation would be equal to $40,000,000.
Post - money valuation =

10, 000, 000
= 4 0, 000, 000
25%

Because the new investment amount in the company was $10,000,000, then
the pre-money valuation is equal to $30,000,000.
Pre - money valuation = 4 0, 000, 000 - 10, 000, 000 = 30, 000, 000
Note
When raising capital, valuation and the dilution of ownership is an important
issue for a business owner to understand. It is critical for the business owner
to select the right partner as often venture capital brings business expertise
and relationships in addition to capital.

81

82

Chapter 2 | Ratios Description

Price earnings ratio (P/E ratio)
Type: Market value measure
Formula
P / E ratio =

Price per share
Earnings per share

Description
The price earnings ratio values the company’s current share price compared
to its per-share earnings. P/E ratios are one method for determining how
“expensive” or “cheap” a stock is. When you are buying stock in a company,
you are really buying the future earnings of that company. By dividing the price
by the earnings gives you some sense of the value of the stock in comparable
terms.
Example
ABC Company has a price per share in the amount of $6.15 and earnings per
share in the amount of $9.48. This gives a P/E ratio of $6.49.
P / E ratio =

6.15
= 6.49
9.48

This number can be compared to other companies in a similar industry. If one
company has a substantially different P/E ratio than another, one can dig into
details to find out if there is a reason for it. In some cases, the market has
incorrectly valued a stock, offering the investor an arbitrage opportunity.

Financial Ratios for Executives

Price to book ratio
Type: Market value measure
Formula
Price to book =

Market price per share
Book value per share

Description
The price to book ratio, also known as market to book ratio, measures the
relative value of a company compared to its share price. The ratio can also be
calculated as total market value over total book value as the per share part in
the equation washes out.
Price to book ratio is a great tool to quickly determine whether a company is
under or overvalued. If the company has a low price to book ratio, it is undervalued and considered a good investment opportunity.
Example
ABC Company has a share price of $6.15 at the end of the year and a book
value per share of $5.20 also at the end of the year. This gives a price to book
ratio of 1.18. This means that the company is overvalued and that the investors are willing to pay a premium to purchase the shares. A price to book
ratio of less than 1 indicates that the company is undervalued.
Price to book =

6.15
= 1.18
5.20

Note
Price to book ratio is also known as market to book ratio.

83

84

Chapter 2 | Ratios Description

Price to cash flow ratio
Type: Liquidity measure
Formula
Price to cash flow =

Price per share
Cash flow per share

Description
The price to cash flow ratio shows the company’s ability to generate cash and
acts as an indicator of liquidity and solvency. Because accounting rules are
different country by country, reported earnings and, therefore, price to earnings ratios, may not make a true comparison. Using cash flow per share is one
method to strip away these differences.
Example
ABC Company has a price per share in the amount of $6.15 and cash flow per
share in the amount of $0.81. This gives a price to cash flow ratio of $7.55.
Price to cash flow =

6.15
= 7.55
0.8145

This number can be compared to other companies in a similar industry.

Financial Ratios for Executives

Price to sale ratio
Type: Market value measure
Formula
Price to sale =

Price per share
Revenue per share

Description
The price to sale ratio is a market value measure, typically used in the valuation
of shares. Price to sale ratio is calculated as price per share divided by revenue
per share.
Example
ABC Company has a price per share at the end of the year in the amount of
$6.10 and revenue per share in the amount of $21.00. This gives a price to
sale ratio of 29.28%.
Price to sale =

6.15
= 29.28%
21.00

Price to sale ratio can also be calculated as market capitalization divided by
total sales.
Price to sale =

Market Cap 61, 500
=
= 29.28%
Total Sales 210, 000

The price to sale can vary significantly by industry and should therefore only
be trended over time or compared to other companies in a similar industry.

85

86

Chapter 2 | Ratios Description

Profit margin
Type: Profitability measure
Formula
Profit margin =

Net income
Sales

Description
The profit margin also known as net profit margin, measures how much of
every dollar of sales a company keeps in earnings.
Example
ABC Company has net income in the amount of 9,475 and sales in the amount
of 210,000. This gives a profit margin of 4.51%.
Profit margin =

9, 475
= 4.51%
210, 000

A profit margin of 4.50% means that the company earns $4.5 for every $100
of sales. A declining profit margin can be an indication of price pressure from
competitors, higher cost of sales, change in product mix, or higher operating
cost.
Note
A decline in the company’s profit margin can in some cases in a mature market
represent a price war, which is lowering profits. A decline in profit margins
can also be a pricing strategy in order for the company to increase its market
share.

Financial Ratios for Executives

Quick ratio (Acid test)
Type: Liquidity measure
Formula
Quick ratio =

Current assets - Inventory
Current liabilities

Description
The quick ratio shows whether a company has enough short-term assets to
cover its immediate liabilities without selling inventory. The higher the quick
ratio, the safer a position the company is in.
Example
ABC Company has currents assets in the amount of $69,765, inventory in
the amount of $24,875, and current liabilities in the amount of $28,500. This
gives a quick ratio of 1.58, which indicates that the company has sufficient current assets to cover its current liabilities more than one and a half times over
without selling inventory.
Quick ratio =

69, 765 - 24 , 875
= 158
.
28, 500

The quick ratio is very similar to the current ratio except that it excludes
inventory because inventory is often illiquid. The nature of the inventory will
determine if the acid test or the current ratio is more applicable to your
situation.
Note
The quick ratio is also known as the acid test.

87

88

Chapter 2 | Ratios Description

Receivable turnover
Type: Performance measure
Formula
Receivable turnover =

Sales
Receivable

Description
The receivable turnover measures the number of times receivables are converted into cash in a given period. This is different from the average collection
period which shows the number of days it takes to collect the receivables.
Ideally, credit sales should be used in the numerator and average receivables
in the denominator. However, these figures are often not readily available in
the financial statements.
Example
ABC Company has sales in the amount of $210,000 and receivable in the
amount of $28,030. This gives a receivable turnover ratio of 7.49. The higher
the receivable turnover ratio is, the better the company is at converting
receivables into cash. A decline in the turnover ratio could mean either a
decline in sales or an indication that the customers are taking a longer time
to pay for their purchases.
Receivable turnover =

210, 000
= 7.49
28, 030

The company can improve the turnover ratio by many methods. The most
popular approach is offering a discount to the customers that pay their outstanding balance earlier, for example, within 30 days of the sales.
Note
Receivable turnover is also known as the accounts receivable turnover.

Financial Ratios for Executives

Receivable collection period
Type: Performance measure
Formula
Receivable collection period =

Days ´ Account receivable
Credit sales

Description
The receivable collection period indicates the amount of time (in days) it takes a
company to convert its receivables into cash.
Example
ABC Company has accounts receivable in the amount of $28,030 and credit
sales in the amount of $210,000. (In this example, credit sales and total sales
are identical.) This gives a receivable collection period of 48.72 days, which
means that it takes a little over one and a half month for the company to
convert credit sales into cash.
Receivable collection period =

365 ´ 28, 030
= 48.72 days
210, 000

The company’s credit terms will have a significant impact on the average collection period. The better the credit terms, the higher the average collection
period. An increase in the receivable collection period could indicate increased
risk of the company’s customers not being able to pay for their purchases. A
possible result is that the company will have to reserve for potential losses or
expense bad debt. Most large companies (nonretail) do not handle many cash
sales. Therefore, when looking at financial statements, it can be assumed that
total sales do not include any cash sales. However, in smaller companies and in
retail businesses, cash sales can be a significant part of the total sales.
Note
The receivable collection period is also known as the average collection
period or simply collection period.

89

90

Chapter 2 | Ratios Description

Return on equity (ROE)
Type: Profitability measure
Formula
Return on equity =

Net income
Shareholder s equity

Description
The return on equity is the amount of net income generated as a percentage of
shareholders equity. If the whole concept of business in general is dominated
by the idea that you can take some money and turn it into more money, then
return on equity is the king of all ratios. ROE measures the company’s profitability by how much profit is generated with the money shareholders have
invested.
Example
ABC Company has net income in the amount of $9,475 and shareholders’
equity in the amount of $52,070. This gives a return on equity (ROE) of
18.19%, which means that for every $100 of equity the company generates
$18.19 of net income.
Return on equity =

9, 475
= 18.19%
52, 07 0

ROE is a valuable number both on its own and compared to other companies. Ideally, you will invest in companies with the highest ROE. All companies
strive to make ROE higher. See the DuPont formula for a breakdown of ROE
into its component to better understand the full picture of how a company
generates ROE.

Financial Ratios for Executives

Return on assets (ROA)
Type: Profitability measure
Formula
Return on assets =

Net income
Total assets

Description
The return on assets shows how profitable a company’s assets are in generating revenue, that is, a ratio of 25% means that for every $100 of investment in
assets, net income of $25 is generated.
Example
ABC Company has net income in the amount of $9,475 and total assets in the
amount of $132,000. This gives an ROA of 7.18%. This means that for every
$100 of investment in assets the company generates $7.18 of net income.
Return on assets =

9, 475
= 7.18%
132, 000

ROA can also be calculated by multiplying the profit margin by the total asset
turnover.
Return on assets = Profit Margin ´ Asset Turnover
Return on assets = 4.51´ 159
. = 7.18%

91

92

Chapter 2 | Ratios Description

Return on capital (ROC)
Type: Profitability measure
Formula
Return on capital (ROC ) =

Net income - Dividend
Invested capital

Description
The return on capital, also known as return on invested capital (ROIC), measures a company’s efficiency in allocating capital under its control to profitable
investments.
When the ROC is greater than the cost of capital (WACC), the company is
creating shareholder value; when it is less than the cost of capital, shareholder
value is destroyed as the company grows. This is one case in which sales
growth is not always desirable!
Example
ABC Company has net income in the amount of $9,475, dividend payout in
the amount of $3,000, and total invested capital in the amount of $52,070.
This gives an ROC in the amount of 12.44%.
Return on Capital (ROC ) =

9, 475 - 3, 000
= 12.44%
52, 070

Note
Return on capital (ROC) is also known as return on invested capital (ROIC).

Financial Ratios for Executives

Return on invested capital (ROIC)
Type: Profitability measure
Formula
Return on invested capital (ROIC ) =

Net income - Dividend
Invested capital

Description
The return on invested capital, also known as return on capital (ROC), measures a company’s efficiency in allocating capital under its control to profitable
investments.
When the ROC is greater than the cost of capital (WACC), the company is
creating shareholder value; when it is less than the cost of capital, shareholder
value is destroyed as the company grows.
Example
ABC Company has net income in the amount of $9,475, dividend payout in
the amount of $3,000, and total invested capital in the amount of $52,070.
This gives a return on capital (ROC) in the amount of 12.44%.
Return on invested capital (ROIC ) =

9, 475 - 3, 000
= 12.44 %
52, 07 0

Note
Return on invested capital (ROIC) is also known as return on capital (ROC).

93

94

Chapter 2 | Ratios Description

Return on investment (ROI)
Type: Profitability measure
Formula
ROI =

Gain from investment - Cost of investment
Cost of investment

Description
The return on investment measures the efficiency of an investment and can also
be used to compare a number of past or prospective investments.
Example
ABC Company considers investing in one additional production unit. The cost
of the new unit is $4,650 and is estimated to produce cash inflows in the
amount of $5,520 over a three-year period. The ROI for the company for this
specific investment is 18.71%.
ROI =

5, 520 - 4 , 650
= 18.71%
4 , 650

This number can be compared to other investment options and nonfinancial
factors to make business decisions.
Note
This calculation does not take into account the time value of money. For further discussion on investment and capital allocation, see Part Four – Capital
Allocation at the end of this book.

Financial Ratios for Executives

Return on net assets (RONA)
Type: Profitability measure
Formula
RONA =

Net income
Fixed assets + Working capital

Description
The return on net assets is a measure of the financial performance of the company that relates earnings to the company’s assets that generate earnings;
fixed assets such as equipment and property, and working capital. The higher
the ratio, the better the company is at efficiently using its assets.
Example
ABC Company has net income in the amount of $9,475 and fixed assets plus
working capital in the amount of $73,885. This gives a RONA of 12.83%. This
means that for every $100 of investment in net assets the company generates
$12.83 of net income.
RONA =

9, 475
= 12.83%
32, 620 + 41, 265

RONA is a valuable number both on its own and compared to other companies. Ideally, you would invest in companies with the highest RONA.

95

96

Chapter 2 | Ratios Description

Return on sales (ROS)
Type: Profitability measure
Formula
Return on sales (ROS ) =

EBIT
Net sales

Description
The return on sales shows the company’s operational efficiency. ROS is also
known as the company’s operating profit margin or the margin before interest
(which can vary by company based on capitalization) and taxes (which also
vary by company).
Example
ABC Company has earnings before interest and taxes (EBIT) in the amount of
$13,525 and net sales in the amount of $210,000. This gives a return of sales
(ROS) of 6.44%. This means that for every $100 of sales, the company generates $6.44 of EBIT.
Return on sales (ROS ) =

13, 525
= 6.44%
210, 000

This number can be compared to the industry average or to other companies
to see how a company is performing relative to its peers.

Financial Ratios for Executives

Revenue per employee
Type: Performance measure
Formula
Revenue per employee =

Sales
Number of employee

Description
The revenue per employee shows the company’s sales in relation to its number
of employees.
Example
ABC Company has sales in the amount of $210,000 and the total number of
employees of 875. This gives revenue per employee in the amount of $240.
This means that on average each employee generates $240 of sales.
Revenue per employee =

210, 000
= 240
875

A company can use this ratio to compare itself to other companies in the
same industry. A company wants the highest revenue per employee possible,
everything else equal, as it denotes higher productivity.
Note
Comparing one company’s revenue per employee to another usually tells you
as much about their industries as it tells you about the specific companies.
The revenue per employee ratios generally tend to be lower in consulting and
services companies compared to manufacturing companies in other industries
that have invested significantly in fixed assets.
Pipeline, mining, and energy are some of the industries with the highest revenue per employee. At the other end of the spectrum are companies in the
consulting and food and service industry.

97

98

Chapter 2 | Ratios Description

Rule of 72
Type: Other
Formula
Rule of 72 =

72
Interest rate

Description
The rule of 72 shows the approximate number of years that it takes to double
an investment at a given interest rate, by dividing the interest rate into 72.
Example
ABC Company has an investment in the amount of $100,000 that yields 12%
return every year. Using the rule of 72, it will then take approximately six years
for the investment to reach a balance of $200,000.
Rule of 72 =

72
=6
12

As illustrated in this Excel table, the rule of 72 is only an approximation of the
time it takes to double an investment at a given interest rate.
A
1
2
3
4
5
6
7
8
9
10

B
Year
1
2
3
4
5
6
7

C

D

Principal Interest 12%
100,000
12,000
112,000
13,440
125,440
15,053
140,493
16,859
157,352
18,882
176,234
21,148
197,382
23,686

F
Balance
112,000
125,440
140,493
157,352
176,234
197,382
221,068

G

Financial Ratios for Executives

Sustainable growth rate (SGR)
Type: Debt measure
Formula
Sustainable growth rate = ROE x (1 - dividend payout ratio )
Description
The sustainable growth rate measures the maximum growth rate the company can sustain without changing its capital structure, for example, having to
increase its financial leverage or issuing equity. In this case, the terminology
should really be “self-sustainable” as the sustainable growth rate is the maximum rate a company can grow without going to outside sources for capital.
Example
ABC Company has a return on equity of 18% and a dividend payout ratio of
31.57%. Using the SGR, this gives a sustainable growth rate of 12.32%.
Sustainable Growth Rate = 0.18 ´ (1 - 0.3157 ) = 12.32%
This means that the maximum increase in sales that the company can sustain
without changing its capital structure is from $210,000 in 2013 to $235,872
in 2014—an increase of 12.32%. If the company wishes to pursue growth in
excess of this, it will have to seek outside capital.

99

100

Chapter 2 | Ratios Description

Terminal value (Horizon value)
Type: Other
Formula
Terminal value =

FCF ´ (1 + growth rate )
WACC - growth rate

Description
The terminal value, also known as the horizon value, shows the value of future
operations beyond the end of the forecast period. It is calculated as the present value of all future cash flows after the forecast period, which is the period
in which the company expects a constant growth rate in perpetuity. Terminal
value is often used in valuation models for the period beyond which you don’t
have specific financial data but expect the company to grow at some constant
rate.
Example
ABC Company has free cash flow in the amount of $5,360, WACC in the
amount of 8.4%, and an assumed constant growth rate of 3%. This gives a
terminal value in the amount of $102,237.
Terminal value =

5, 360 ´ (1 + 0.03)
8.4 % - 3.0%

= 102, 237

Note
The terminal value is also known as the horizon value.

Financial Ratios for Executives

Times interest earned (TIE)
Type: Debt measure
Formula
Times interest earned =

EBIT
Interest expense

Description
The times interest earned, also known as interest coverage, measures a company’s ability to pay interest on its outstanding debt and to what extent operating income can decline before the company is unable to meet its annual
interest expenses.
The lower the ratio, the higher the likelihood that the company will not be
able to service its debt (pay interest expenses on its debt). If the TIE ratio
goes below 1, the company is not generating enough earnings to service its
debt.
Example
ABC Company has earnings before interest and taxes (EBIT) in the amount of
$13,525 and interest expenses in the amount of $1,190. This gives a TIE ratio
in the amount of 11.37, which means that the company has earnings more
than 11 times its interest expense.
Times interest earned =

13, 525
= 1137
.
119
, 0

A TIE ratio of 11.37 provides sufficient coverage that the company will be able
to service its debt.
Note
Times interest earned is also known as interest coverage.

101

102

Chapter 2 | Ratios Description

Total assets turnover
Type: Performance measure
Formula
Total assets turnover =

Sales
Total assets

Description
The total assets turnover ratio measures the sales generated per dollar of assets
and is an indication of how efficient the company is in utilizing their assets to
generate sales.
Asset-intensive companies such as mining, manufacturing, and so on will generally have lower asset turnover ratios compared to companies that have
fewer assets such as consulting and service companies.
Example
ABC Company has sales in the amount of $210,000 and total assets in the
amount of $132,000. This gives a total asset turnover ratio of 1.59.
Total asset turnover =

210, 000
= 1.59
132, 000

This means that for every dollar invested in assets the company generates
$1.59 of sales. This number should be compared to the industry average for
companies in the same industry.

Financial Ratios for Executives

WACC (Weighted average cost of capital)
Type: Other
Formula
WACC = Wd ´ R d ´ (1 - Tax rate ) + Wps ´ R ps + Wcs ´ R cs
Description
WACC means weighted average cost of capital, also known as cost of capital,
and measures the company’s average costs of financing. Most companies are
financed by both debt and equity.
WACC measures the weighted average cost of these two sources of capital.
This rate is most often used in capital allocation for evaluating future projects.
In general, all projects that the company takes on should yield a return greater
that the weighted average cost of capital.
Example
ABC Company has total debt in the amount of $79,930. The weight of the
company’s financing is 61% debt and 39% equity, the rate of which is financed
with 7% and 13%, respectively. The company’s effective tax rate is 22%. Tax
rate used in the calculation should be the company’s effective tax rate and not
the statutory rate.
This gives a weighted average cost of capital in the amount of 8.40%. Projects
that are not expected to return greater than 8.40% would generally be declined
unless they show some other noneconomic benefit to the company.
WACC = 0.61 ´ 0.07 ´ (1 - 0.22 ) + 0 ´ 0 + 0.39 ´ 0.13 = 8.4 0%
Wd, Wps, and Wcs are the weights (percentages) used for debt, preferred and
common shares, respectively. Rd, Rps, and Rcs are the (interest) rates for debt,
preferred, and common shares. Note that ABC Company has no preferred
shares, respectively.

103

104

Chapter 2 | Ratios Description

Weighted average cost of capital (WACC)
Type: Other
Formula
WACC = Wd ´ R d ´ (1 - Tax rate ) + Wps ´ R ps + Wcs ´ R cs
Description
The weighted average cost of capital, also known as cost of capital or WACC,
measures the company’s average costs of financing. Most companies are
financed by both debt and equity.
WACC measures the weighted average cost of these two sources of capital.
This rate is most often used in capital allocation for evaluating future projects.
In general, all projects that the company takes on should yield a return greater
that the weighted average cost of capital.
Example
ABC Company has total debt in the amount of $79,930. The weight of the
company’s financing is 61% debt and 39% equity, the rate of which is financed
with 7% and 13%, respectively. The company’s effective tax rate is 22%. Tax
rate used in the calculation should be the company’s effective tax rate and not
the statutory rate.
This gives a weighted average cost of capital in the amount of 8.40%. Projects
that are not expected to return greater than 8.40% would generally be declined
unless they show some other noneconomic benefit to the company.
WACC = 0.61 ´ 0.07 ´ (1 - 0.22 ) + 0 ´ 0 + 0.39 ´ 0.13 = 8.4 0%
Wd, Wps, and Wcs are the weights (percentages) used for debt, preferred and
common shares, respectively. Rd, Rps, and Rcs are the (interest) rates for debt,
preferred, and common shares. Note that ABC Company has no preferred
shares, respectively.

Financial Ratios for Executives

Working capital ratio
Type: Performance measure
Formula
Working capital ratio =

Current assets
Current liabilities

Description
The working capital is the capital that a company has for day-to-day operations. The working capital ratio indicates whether the company has enough
short-term assets (current assets) to cover its short-term liabilities (current
liabilities) and thus leave the company with “working capital” to support its
current operations. A ratio below 1 is an indication of negative working capital, meaning that the company will most likely not be able to cover its current
short-term obligations.
Example
ABC Company has current assets in the amount of $67,765 and current liabilities in the amount of $28,500. This provides the company with a working
capital ratio in the amount of $41,265 and a working capital ratio of 2.44.
Working capital ratio =

69, 765
= 2.44
28, 500

This means that the company can cover its short-term liabilities almost
2.5 times with its short-term assets. Companies may have a hurdle working
capital ratio they need to meet in order to get funding from lenders.
Working capital is defined as current assets less current liabilities.
Working capital = Current assets – Current liabilities
Working capital = 69,765 – 28,500 = 41,265

105

CHAPTER

3
ABC Company
The following section provides financial statement data for the hypothetical
ABC Company, which are used to calculate most of the examples of financial
ratios in this book.
This chapter includes the following financial statements by ABC Company:
• Income statement
• Balance sheet
• Assets
• Liabilities & equity
• Cash flow statements
• Supplementary information
It should be noted that these are not U.S. GAAP-compliant financial statements inasmuch as they include non-GAAP measures such as EBIT (earnings
before interest and taxes) and EBITDA (earnings before interest, taxes, depreciation, and amortization).

108

Chapter 3 | ABC Company
In general, a non-GAAP financial measure is a measure of a company’s performance, financial position, or cash flows that either excludes or includes
amounts that are not normally excluded or included in the most directly
comparable measure calculated and presented in accordance with GAAP
(Generally Accepted Accounting Principles).
The following financial statements are structured to provide easy reference
for the ratios in this book.

Financial Ratios for Executives

ABC Company—Income statement
ABC COMPANY—INCOME STATEMENT
(thousands of US dollars)

2013
Sales
Cost of goods sold
Gross profit
Operating expenses (SG&A)
EBITDA
Depreciation
Amortization
EBIT
Interest income
Interest expense
Income before tax
Provision for tax
Net income
Retained earnings Jan 1
Net income
Dividend
Retained earnings Dec 31
COMPANY DATA
Employees
Share price
Dividend per share
Effective tax rate

2012

210,000
(163,000)
47,000
(33,000)
14,000
(100)
(375)
13,525
110
(1,190)
12,445
(2,970)
9,475

203,700
(158,110)
45,590
(32,010)
13,580
(97)
(364)
13,119
107
(1,154)
12,072
(2,881)
9,191

175,182
(135,975)
39,207
(27,529)
11,679
(83)
(313)
11,283
92
(993)
10,382
(2,478)
7,904

40,595
9,475
(3,000)
47,070

34,354
9,191
(2,950)
40,595

28,950
7,904
(2,500)
34,354

2013

$
$

2011

875
6.15
0.30
23.87%

2012

$
$

847
6.20
0.30
23.87%

2011

$
$

840
5.90
0.25
23.87%

109

110

Chapter 3 | ABC Company

ABC Company—Assets
ABC COMPANY—ASSETS
(thousands of US dollars)

2013

2012

2011

Cash and cash equivalents
Securities
Accounts receivable
Inventory
Other current assets
Total current assets

16,450
280
28,030
24,875
130
69,765

14,690
272
27,189
24,882
126
67,159

12,633
234
23,383
21,399
108
57,757

Net PP&E
Other investments
Other long-term assets
Total non-current assets

32,620
8,740
20,875
62,235

31,641
8,478
20,249
60,368

27,212
7,291
17,414
51,916

132,000

127,527

109,673

Total Assets

Financial Ratios for Executives

ABC Company—Liabilities and equity
LIABILITIES AND SHAREHOLDERS' EQUITY
(thousands of US dollars)

2013

2012

2011

Short term debt
Accounts payable
Accrued taxes
Other accruals
Current portion long-term debt
Total current liabilities

2,795
18,460
4,680
105
2,460
28,500

2,711
19,570
4,540
102
2,386
29,309

2,332
16,830
3,904
88
2,052
25,206

LT debt, less current portion
Deferred taxes
Other deferrals
Other long-term liabilities
Total non-current liabilities

16,750
3,260
29,820
1,600
51,430

17,320
3,162
30,589
1,552
52,623

14,895
2,719
26,307
1,192
45,113

Total liabilities

79,930

81,932

70,319

Common stock (10,000,000)
Retained earnings
Total shareholders equity

5,000
47,070
52,070

5,000
40,595
45,595

5,000
34,354
39,354

132,000

127,527

134,879

Total liabilities & equity

111

112

Chapter 3 | ABC Company

ABC Company—Cash flow statement
CASH FLOW STATEMENT
(thousands of US dollars)

2013

2012

2011

Net income
Depreciation and Amortization
Change in receivable
Change in inventories
Change in other current assets
Change in account payable
Change in accruals
Operating activities

9,475
475
(841)
7
(4)
(1,110)
143
8,145

9,191
461
(3,806)
(3,483)
(18)
2,740
650
5,735

7,904
396
(3,754)
(2,875)
(22)
2,258
541
4,448

Cash used to acquire PP&E
Change in securities
Other long term liabilities
Change in short term investment
Investing activities

(1,454)
(8)
(626)
(262)
(2,350)

(4,891)
(38)
(1,187)
(2,835)
(8,951)

(3,784)
(45)
(1,254)
(2,258)
(7,341)

Change in debt
Deferred taxes & other deferrals
Dividend payment
Financing activities

(412)
(623)
(3,000)
(4,035)

3,138
5,085
(2,950)
5,273

2,541
6,041
(2,500)
6,082

Net change in cash
Cash at beginning of year
Cash at end of year

1,760
14,690
16,450

2,057
12,633
14,690

3,189
9,444
12,633

Financial Ratios for Executives

ABC Company—Supplementary information
SUPPLEMENTARY INFORMATION
(thousands of US dollars)

2013

2012

2011

Cash and cash equivalents
Accounts receivable
Inventory
Operating current assets

16,450
28,030
24,875
69,355

14,690
27,189
24,882
66,761

12,633
23,383
21,399
57,415

Accounts payable
Accrued taxes
Other accruals
Operating current liabilities

18,460
4,680
105
23,245

19,570
4,540
102
24,211

16,830
3,904
88
20,822

Operating current assets
Operating current liabilities
Net operating working capital

69,355
23,245
46,110

66,761
24,211
42,550

57,415
20,822
36,593

Net operating working capital
Net PP&E
Other long-term assets
Total net operating capital

46,110
32,620
20,875
99,605

42,550
31,641
20,249
94,440

36,593
27,212
17,414
81,218

Short term debt
Current portion long-term debt
LT debt, less current portion
Total debt

2,795
2,460
16,750
22,005

2,711
2,386
17,320
22,417

2,332
2,052
14,895
19,279

200
200

190
190

175
175

Audit fees
Total professional services

113

CHAPTER

4
Capital
Allocation
Capital allocation is the process used to analyze projects and decide which ones
should or should not be included in the company’s capital budget (plan for
spending money on growth and sustaining current operations). This chapter
gives you the tools to make these decisions based upon potential growth and
profitability. After the analysis has been performed, the capital budget itself outlines the planned expenditures on capital assets. The capital allocation process
is important as it outlines the long-term investment strategy of the company.
The tools that we will describe in this chapter are:
• Net present value (NPV)
• Internal rate of return (IRR)
• Modified internal rate of return (MIRR)
• Payback method
• Discounted payback method
• Profitability index (PI)
• Total cost of ownership (TCO)

116

Chapter 4 | Capital Allocation
Large projects with high risk require more analysis. Smaller projects or
replacement projects can often be analyzed by simply looking at the payback
method or the internal rate of return.
These tools provide a variety of information to the key decision makers. By
using Microsoft Excel it is very easy to set up the various formulas and compare each project’s costs, benefits, and rates of return against those of others.

Financial Ratios for Executives

Net present value (NPV)
Description
The net present value (NPV) of a project is the present value of the future cash
inflows less the present value of the future cash outflows discounted at the
cost of capital (WACC). The higher the net present value, the more desirable
it is to undertake the project.
Example
ABC Company considers investing in one additional production unit. The cost
of the new unit is $4,650 and is estimated to produce net cash inflows in the
amount of $5,520 over a three-year period. At the end of year three, the value
of the production unit will be equal to zero.
The easiest way to calculate a projects NPV is to set up the year over year
cash flows in Excel and use the Excel “=NPV” function to calculate the return
as illustrated here:
A
1
2
3
4
5
6
7
8
9
10
11

B
Year
Cash flows
NPV
Year
Cash flows
NPV

C
0
(4,650)

D
1
1,100

E

F

2
1,850

3
2,570

2
1,850

3
2,570

G

=C3+NPV(F10,D3:F3)
0
(4,650)
296

1
1,100

WACC

5.00%

Based on the initial investment, the expected cash inflows, and the cost of
capital of 5%, the new production unit will have an NPV of $296. This number
can be compared to other projects to help determine a course of action with
regard to capital allocation. At the very least, this number is positive and indicates that it is a worthwhile investment by itself, but perhaps not when compared to others or when considering the capital constrains of the company.

117

118

Chapter 4 | Capital Allocation

Internal rate of return (IRR)
Description
A project’s internal rate of return (IRR) indicates the discount rate that makes
the net present value of all cash in and out flows from the specific project
equal zero under the assumption that the return can be reinvested at the
same rate (the IRR rate). This number is not necessarily helpful to managers
by itself, but only when compared to the IRR of other projects and to the
company’s WACC. The higher a project's internal rate of return, the more
desirable it is to undertake the project.
Example
ABC Company considers investing in one additional production unit. The cost
of the new unit is $4,650 and is estimated to produce net cash inflows in the
amount of $5,520 over a three year period as laid out in the spreadsheet
shown here. At the end of year three, the value of the production unit will be
equal to zero. The easiest way to calculate a project’s IRR is to set up the year
over year cash flows in Excel and use the Excel “=IRR” function to calculate
the return as illustrated here:
A
1
2
3
4
5
6
7
8
9
10
11

B

C

Year
Cash flows

0
(4,650)

IRR

=IRR(C3:F3)

Year
Cash flows

0
(4,650)

IRR

D

E

F

1
1,100

2
1,850

3
2,570

1
1,100

2
1,850

3
2,570

G

7.94%

Based on the expected cash flows, the new production unit will have an internal rate of return (IRR) of 7.94%. Again, this IRR alone tells you very little; it
needs to be compared to other projects’ IRRs and to the company’s WACC
in order to determine if the project should be pursued or not.

Financial Ratios for Executives

Modified internal rate of return (MIRR)
Description
Modified internal rate of return (MIRR) is no different than the internal rate of
return (IRR) except that is assumes that the cash flows from the project are
reinvested at the company’s cost of capital (WACC) instead of the IRR. This
makes MIRR a better indicator of the project’s true benefit to the organization. The higher a project's modified internal rate of return, the more desirable it is to undertake the project.
Example
ABC Company considers investing in one additional production unit. The cost
of the new unit is $4,650 and is estimated to produce net cash inflows in the
amount of $5,520 over a three-year period as shown below. At the end of
year three, the value of the production unit will be equal to zero.
The easiest way to calculate a projects MIRR is to set up the year over year
cash flows in Excel and use the Excel “=MIRR” function to calculate the return
as illustrated here:
A
1
2
3
4
5
6
7
8
9
10
11

B
Year
Cash flows
MIRR
Year
Cash flows
MIRR

C
0
(4,650)

D
1
1,100

E

F

2
1,850

3
2,570

2
1,850

3
2,570

G

=MIRR(C3:F3,F10, F10)
0
(4,650)
7.18%

1
1,100

WACC

5.00%

Based on the expected cash flows and a WACC of 5%, the new production
unit will have MIRR of 7.18%. Again, the MIRR alone tells you very little; it
needs to be compared to other projects MIRRs and to the company’s WACC
in order to determine if the project should be pursued or not.

119

120

Chapter 4 | Capital Allocation

Payback method
Description
The payback method measures the time it takes for a company to recover the
capital invested in the project. The model does not consider the time value
of money, nor does it consider the cash flows beyond the payback period. In
general, the shorter the payback period, the more desirable it is to undertake
the project. The payback method is usually considered a “quick and dirty”
capital allocation tool given these simplifying assumptions.
Example
ABC Company considers investing in one additional production unit that costs
$7,540 and is estimated to produce net cash inflows in the amount of $9,200
over a six-year period. Excel does not have a payback function but it can be
calculated manually, by looking at the year where the cumulative cash flow
becomes positive and dividing the cash flow from that year by the amount
needed to become positive and adding it to that year.
A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

B

Year
0
1
2
3
4
5
6

C

D

F

Cash Cumulative
Flow Cash Flow
(7,540)
(7,540)
4,000
(3,540)
3,000
(540)
1,000
460
500
960
400
1,360
300
1,660

Payback period

=B6+(-D6/C7)

Payback period

2.54 years

Based on the expected cash flow, the payback period for the new production
unit is 2.54 years.

Financial Ratios for Executives

Discounted Payback method
Description
The discounted payback method measures the time it takes for a company to
recover the capital invested in the project. The discounted payback model
takes into consideration the time value of money by discounting the cash
flows at the cost of capital (WACC). This makes it a better indicator when
compared to the regular payback method. In general, the shorter the discounted payback period, the more desirable it is to undertake the project.
Example
ABC Company considers investing in one additional production unit. The cost
of the new unit is $7,540 and is estimated to produce cash inflows in the
amount of $9,200 over a six-year period. There is no specific function in excel
to calculate the discounted payback period. However, it can be calculated
manually as outlined below, where the payback period is the period in which
the cumulative cash flow becomes positive.
A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

B

C

D

F

G

Discounted Cumulative
Year Cash Flow Cash Flow Cash Flow
0
(7,540)
(7,540)
(7,540)
1
4,000
3,810
(3,730)
2
3,000
2,721
(1,009)
3
1,000
864
(146)
4
500
411
266
WACC

5%

Payback period

=B7+(-F7/D8)

Payback period

3.35

Years

Based on the expected cash flow and the cost of capital, the payback period
for the new production unit is 3.35 years. This is slightly longer than the regular payback period as it takes into consideration the time value of money.

121

122

Chapter 4 | Capital Allocation

Profitability index
Description
The profitability index measures the relative profitability of a project calculated
by dividing the present value of future cash flows of a project by the initial
investment required for the project. The higher the profitability index, the
more desirable it is to undertake the project. A value less than one indicate
that the present value of the project is less that the initial investment and is
therefore a bad investment.
ABC Company considers investing in one additional production unit. The cost
of the new unit is $4,650 and is estimated to produce cash inflows in the
amount of $5,520 over a three-year period. At the end of year three, the
value of the production unit will be equal to zero. Discounting the future cash
inflows at a discount rate of 5% (WACC) gives a present value of $4,946.
A
1
2
3
4
5
6
7
8
9
10
11
12

B

C

D

Year
Cash flows

0
(4,650)

Investment

4,650

WACC

5%

PV

4,946

PI

1.06

1
1,100

E
2
1,850

F

G

3
2,570

Invest amount
Cost of capital
PV of future cash flows
Profitability index

Based on the initial investment, the expected future cash flow and the cost
of capital of 5% the new production unit will have a Profitability index of 1.06
indicating that the present value of the future cash flow is larger than the
initial investment.

Financial Ratios for Executives

Total cost of ownership (TCO)
Description
The tools discussed previously in this section are used to determine which
projects should and should not be included in the capital budget. These tools
often only highlight the direct benefits of the specific project under consideration. Good managers know that most projects do not exist in a vacuum and
that there are often intangible benefits and drawbacks associated with new
projects that modeling does not always include.
A total-cost of ownership (TCO) analysis can be used to measure the current
and future contribution that a projects implementation adds to the company.
Its focus is not solely on quantitative measures but also qualitative measures
that include direct and indirect benefits.
Direct benefits are cash flows directly associated with the project. Indirect
benefits include items such as overhead, operating and maintenance, productivity improvement, and so on.
Measuring qualitative benefits can be much harder as these are softer benefits,
such as employee satisfaction, better work environment, resulting in less sick
days, and so on. Some economists call these social benefits.
TCO analyses are typically done with large projects, such as a new ERP implementation or a new office building, to afford management an overview of all
the costs and benefits associated with this new initiative before allocating
capital to the specific project.
Completing a TCO analysis is quite comprehensive and time-consuming. The
main reason is that qualitative data is not easy to quantify as is often generated
by interviews, observations and comparison to similar projects either within
the company or with similar companies in the industry. Total cost of ownership should therefore mainly be considered with larger projects or when
qualitative benefits are significant to the quantities ones.

123

Appendix

A
Abbreviations
AFN

Additional funds needed

BEP

Basic earnings power

CAGR

Compound annual growth rate

CAPM

Capital asset pricing model

CCC

Cash flow conversion cycle

CFROI

Cash flow return on investment

DPO

Days payable outstanding

DSO

Days sales outstanding

EBIT

Earnings before interest and taxes

EBITDA

EBIT plus depreciation and amoritization

EV

Enterprice value

EVA

Economic value added

FCF

Free cash flow

GAAP

Generally accepted accounting principles

IRR

Internal rate of return

MIRR

Modified internal rate of return

MVA

Market value added

NOPAT

Net operating profit after taxes

NOWC

Net operating working capital

NPV

Net present value

126

Appendix A | Abbreviations
OCF

Operating cash flow

PE Ratio Price to earnings ratio
PBIT

Profit before interest and taxes

PI

Profitability index

ROA

Return on assets

ROC

Return on capital

ROE

Return on equity

ROI

Return on investment

ROIC

Return on invested capital

RONA

Return on net assets

ROS

Return on sales

TCO

Total cost of ownership

TIE

Time interest earned

WACC

Weighted average cost of capital

Appendix

b
Useful Websites
There are numerous websites where you can find additional information on
financial ratios, financial information on public companies, and industry standards. Here are some of our favorites:
• www.aicpa.org
• www.barrons.com
• www.bloomberg.com
• www.businessweek.com
• www.cfo.com
• www.dealbook.nytimes.com
• www.fasb.org
• www.finance.yahoo.com
• www.hoovers.com
• www.investopedia.com
• www.marketwatch.com
• www.money.cnn.com
• www.morningstar.com
• www.online.barrons.com
• www.pehub.com
• www.reuters.com
• www.sec.gov
• www.wikipedia.org
• www.wsj.com

I
Index
A
ABC company
assets, 110
cash flow statement, 112
description, 107
income statement, 109
liabilities and equity, 111
supplementary information, 113
Account receivable turnover
(receivable turnover), 10

payback method, 120
profitability index, 122
TCO, 123
Capital asset pricing model (CAPM), 20–21
Capitalization ratio, 22
Capital structure ratio, 21
Cash conversion cycle (CCC), 23
Cash flow per share, 24
Cash flow ratios, 4

Acid test (quick ratio), 9

Cash flow to debt ratio, 25

Additional funds needed (AFN), 11–12

Cash ratio, 26

Altman’s Z-Score, 12

Collection period, 27

Asset to equity, 13

Compound annual growth
rate (CAGR), 28

Asset turnover, 14
Audit ratio, 15
Average collection period, 16

B
Basic earning power (BEP), 17
Book value per share, 18

Contribution margin, 29
Contribution margin ratio, 30
Cost of capital (WACC), 31–32
Current ratio, 32–33
Current yield (dividend yield), 33–34

Breakeven point, 19

D

C

Days in inventory
(days inventory outstanding), 34

Capital allocation
description, 115–116
discounted payback method, 121
IRR, 118
MIRR, 119
NPV, 117

Days inventory outstanding
(days in inventory), 35
Days payable (payable period), 36
Days sales in cash, 37
Days sales outstanding (DSO), 38

130

Index
Debt ratios, 5, 41
Debt to assets, 39

I, J, K
Interest coverage, 64

Debt to capital ratio, 40

Internal rate of return (IRR), 118

Debt to equity, 42

Inventory conversion period, 65

Discounted payback method, 121

Inventory turnover, 66

Dividend payout ratio, 43

IRR. See Internal rate of return (IRR)

Dividend per share, 44
Dividend yield (current yield), 45

L

DuPont ratio, 46

Leverage, 67

E
Earnings before interest and
taxes (EBIT), 47, 49, 107
Earnings before interest, taxes, depreciation
and amortization (EBITDA), 48,
50–51, 107
Earnings per share (EPS), 2, 52
Economic value added (EVA), 53
Effective tax rate, 54
Enterprise value (EV), 55
Equity multiplier, 56–57
Exercise value, 57–58

F
Financial ratios, 1–2
Financial statement data, ABC
company, 107–113
Fixed assets turnover, 58

Liquidity ratios, 3

M
Market capitalization (market cap), 68
Market to book ratio, 69
Market to debt ratio, 70
Market value added (MVA), 71
Market value of equity, 72
Market value ratios, 2
Modified internal rate of return (MIRR), 119

N
Net cash flow, 73
Net operating profit after
taxes (NOPAT), 74
Net operating working capital (NOWC), 75
Net present value (NPV), 117
Net profit margin, 76

Free cash flow (FCF), 59

NPV. See Net present value (NPV)

G

O

Gearing, 60

Operating cash flow (OCF), 77

Generally accepted accounting
principles (GAAP), 108

Operating profit margin, 78

Gordon constant growth model, 61

P

Gross profit margin, 62

Payable period (days payable), 79

H
Horizon value (terminal value), 63

Payback method, 120
Performance ratios, 3–4
Post-money valuation, 80

Index
Pre-money valuation, 81

Return on capital (ROC), 92

Price earnings ratio (P/E ratio), 2, 82

Return on equity (ROE), 90

Price to book ratio, 83

Return on invested capital (ROIC), 93

Price to cash flow ratio, 84

Return on investment (ROI), 94

Price to sale ratio, 85

Return on net assets (RONA), 95

Profitability index, 122

Return on sales (ROS), 96

Profitability ratios, 4

Revenue per employee, 97

Profit margin, 86

Rule of 72, 98

Q

S

Quick ratio (acid test), 87

Sustainable growth rate (SGR), 99

R

T, U,V

Ratios
cash flow, 4
debt, 5
description, 7–8
financial, 1
liquidity, 3
market value, 2
performance, 3–4
profitability, 4

TCO. See Total-cost of
ownership (TCO)

Receivable collection period, 89
Receivable turnover, 88

Weighted average cost of
capital (WACC), 103–104

Return on assets (ROA), 91

Working capital ratio, 105

Terminal value (Horizon value), 100
Times interest earned (TIE), 101
Total assets turnover, 102
Total-cost of ownership (TCO), 123

W, X,Y, Z

131

Financial Ratios for
Executives
How to Assess Company Strength, Fix
Problems, and Make Better Decisions

Michael Rist
Albert J. Pizzica


Financial Ratios for Executives: How to Assess Company Strength, Fix Problems, and
Make Better Decisions
Copyright © 2015 by PENHAGENCO LLC
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addresses the real needs of our readers.
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We are always interested in your feedback or ideas for new titles. Perhaps
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The Apress Business Team

About the Authors
Michael Rist is a senior financial executive with
more than 20 years of international operations
and business experience within corporate
finance for public and privately-held companies
and Big 4 public accounting. He has previously
been chief financial officer of Mosaica Education,
Inc., The Elwing Company, and SES Engineering.
He has worked across the telecommunication,
technology, pharmaceutical, industrial manu­
facturing, and education industries. He is a
Certified Public Accountant and active in a
number of professional organizations. Rist
holds a BS in Accounting and Finance from
Copenhagen Business School and an MBA from
the School of Business, Villanova University.
Albert J. Pizzica is an entrepreneur with
experience at half a dozen startup companies.
He is currently Vice President of Strategic
Programs at American Aerospace and Vice
President of Government and Defense
Programs at The Elwing Company. He is also the
principal at Pizzica Industries LLC, a startup and
medium business consulting company. Pizzica’s
previous experience includes aseptic vaccine
manufacturing operations at Merck and as a
U.S. Navy officer in various operations roles.
Pizzica holds a BS in Mechanical Engineering from Cornell University and an
MBA from the School of Business, Villanova University.

Acknowledgments
This book reflects the effort, help, and support of many people without
whom this book would not have been possible.
Special acknowledgments to our families for making this book come to life.
We would also like to acknowledge all of the individuals who made significant
contributions toward the completion of this book, especially Ryan Ohlson,
Michael Haller, and George Lemmon, whose detailed review and feedback
was such a great help.
We extend our sincere thanks to all of you.

Preface
We wrote this book specifically for today’s global financial and nonfinancial
executives who are looking for an easy-to-use reference book on financial
ratios and capital allocation to assist them in operational and strategic
decision making. Our aim is to make financial ratios simple and intuitive for
everyone to understand.
This book contains over one hundred financial ratios and other calculations
commonly used in businesses around the world—including return on investment
(ROI), return on assets (ROA), return on equity (ROE), economic value added
(EVA), and debt ratio just to name a few.
We have also included a section on what financial and nonfinancial executives
need to understand about capital allocation before entering the annual budget
meeting or any other business meeting in which capital allocation is discussed.
This section describes tools such as net present value (NPV), internal rate of
return (IRR), the payback method, and total cost of ownership.
Given that a good understanding of financial ratios, valuation tools, and
return on investment calculations are important components of any business
system, we set out to create a simplified handbook with short descriptions,
calculations, and examples for each of the ratios.
It is important to note that financial analysis is not always black and white.
Two experienced finance people can sit down with identical financial
information for a company, come up with different ratios, and both be right.
Often, financial analysis is more of an art than a science. Accounting and
business have their own language and, as with any language, sometimes the
same words can have different meanings to different people. Always bear in
mind that the particular meaning of a general ratio depends on context.
Consistency is key. Sometimes certain adjustments, such as non-recurring
items, are made to specific line items, so as long as you are consistent in doing
the same calculation year over year or when comparing companies against
each other, your comparisons still have meaning. It may not matter if another
accountant, colleague, or business manager gets a different answer; it is the
internally consistent comparison and the underlying analysis that matter.

xii

Preface
Microsoft Excel has built-in functions for some of the calculations in this
book, such as IRR and NPV. The built-in functions may calculate ratios
slightly different than the mathematical formulas do. Again, however, as long
as you consistently use the same tool, any disparity between tools may not
be analytically significant.
Some ratios are known by multiple names (e.g., the acid test is also known as
the quick ratio). For completeness and easy reference, all ratios are duplicated
under each name so no back-and-forth page turning is required.
In some of the examples we have also given our readers a sense of the
normal ranges of values for specific ratios in various industries.
Remember, the tools described in this book are just that—tools. Whether
one carpenter uses a hammer slightly differently than the next carpenter
does not matter as long as the job gets done properly. Provided you use the
tools in this book consistently and with good business judgment, they can
help you make good business decisions.

Other Apress Business Titles You Will Find Useful

The Handbook of
Financial Modeling
Avon
978-1-4302-6205-3

Financial Modeling for
Business Owners and
Entrepreneurs
Sawyer
978-1-4842-0371-2

The Handbook of
Professionally Managed
Assets
Fevurly
978-1-4302-6019-6

Traders at Work
Bourquin/Mango
978-1-4302-4443-1

Practical Methods of
Financial Engineering
and Risk Management
Chatterjee
978-1-4302-6133-9

Tactical Trend Trading
Robbins
978-1-4302-4479-0

Broken Markets
Mellyn
978-1-4302-4221-5

Data Modeling of
Financial Derivatives
Mamayev
978-1-4302-6589-4

Managing Derivatives
Contracts
Shaik
978-1-4302-6274-9

Available at www.apress.com