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Gross profit is the money left for a business after subtracting the cost of goods sold from the sales price. To illustrate, I’ll give you a real life example of gross profit for a popular product at one of my companies. Gross Profit The gross profit is the total revenue subtracted by the cost of [...]
Although we are only a few lines into the income statement, we can already calculate our first financial ratio. The gross profit margin is a measurement of a company’s manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue / sales left after subtracting the cost of [...]
Debt can increase a company’s return on equity, but too much can take a company into bankruptcy. The key is to calculate something known as the debt to equity ratio, which tells you how much debt a company has for every $1 in net worth. The amount of long term debt on a company’s balance [...]
The current ratio is a financial ratio designed to tell you the level of current assets compared to current liabilities. The current ratio that is “good” for a company depends upon its industry. The current ratio is another test of a company’s financial strength. It calculates how many dollars in assets are likely to be [...]
Calculating Asset Turnover The asset turnover ratio calculates the total revenue for every dollar of assets a company owns. To calculate asset turnover, take the total revenue and divide it by the average assets for the period studied. (Note: you should know how to do this. In lesson 3 we took the average inventory and [...]
As you learned in the investing lessons, return on equity (ROE) is one of the most important indicators of a firm’s profitability and potential growth. Companies that boast a high return on equity with little or no debt are able to grow without large capital expenditures, allowing the owners of the business to withdrawal cash [...]
If you frequently read financial magazines, newspapers, and annual reports, you have no doubt come across something called enterprise value. You may have wondered what it is, how it’s calculated, and why it’s so important. What is Enterprise Value? Enterprise value is a figure that, in theory, represents the entire cost of a company if [...]
The price-to-earnings ratio (or p/e ratio for short) is the most popular way to measure the relative valuation of two stocks. It tells the investor how much Wall Street is willing to pay for $1 of earnings. A $10 stock with $1 EPS (earnings per share) is going to have a P/E of 10 ($10 [...]
Leverage Financial Ratios Those financial ratios that show the percentage of a company’s capital structure that is made up on debt or liabilities owed to external parties Liquidity Financial Ratios Those financial ratios that show the solvency of a company based on its assets versus its liabilities. In other words, it lets you know the [...]
Some investors prefer to focus on a financial ratio known the price to cash flow ratio instead of the more famous price to earnings ratio (or p/e ratio for short). Sit back, relax, and grab a cup of coffee because you’re about to learn everything you ever wanted to know about this often overlooked stock [...]