US GAAPFinancial Ratios100

Dear readers,

in order to make solid investments, investors compare companies within their peer group. For this purpose, key ratios such as operating income, EBITDA, working capital or cash flow have become increasingly important in recent years. These ratios are part of the daily business in order to measure corporate perfomance and to get an insight into a company’s fundamental situation. It is therefore an important prerequisite to know a ratio’s significance not only for investors to make the right decisions, but also for managers to lead a business unit into the right direction. But this reference book not only addresses investors and managers, it is also helpful for auditors, tax accountants or students to quickly refresh the know how on corporate ratios both quickly and in-depth.

For a better understanding we have added a sample calculation to each ratio’s definition as well as the fields of application. A critical assessment of each financial ratio is explained by discussing both advantages and disadvan-tages. Please note that differences in the way of calculation may still exist, which you should be aware of.

When analyzing financial ratios, one should make sure to always compare the ratios relative to the peer-group and the industry standards, as otherwise an isolated number would have a very limited significance. Finally the key for successful research is to transfer comprehensive analysis of several indi-cators into a meaningful result. For this purpose the book delivers a strong added value.

Sincerely, your authors

E-mail your comments to: USGAAP@cometis.de

Author’s preface

Table of content

Income statementBalance sheetCash flow statementAdditional information

Exemplary annual report 1.1.11.21.31.4

13141617

Hidden assetsNet debtGoodwillAverage stockInvested capitalProvisions to total capitalRetained earnings to total assetsInventories to total capitalDegree of asset depreciation

Balance sheet ratios 3.3.13.23.33.43.53.63.73.83.9

394041424344454647

Operating income / EBITEBITDAIncome before taxesNet incomeFinancial resultNet operating profit after taxes (NOPAT)Tax rateR & D cost ratioCost of sales to total operating expenseDepreciation and amortization to total operating expenseDepreciation and amortization to salesWrite-down structurePersonnel expense to total operating expensePersonnel productivitySales per employee

Income statement ratios 2.2.12.22.32.42.52.62.72.82.92.102.112.122.132.142.15

212223242526272829303132333435

Table of content

Cash flow from operating activitiesCash flow from investing activitiesCash flow from financing activitiesFree cash flowCash flowCapex to depreciation and amortizationCapex to sales

Cash flow ratios 4.4.14.24.34.44.54.64.7

51525354555657

Profitability ratios

Operating marginEBITDA marginGross profit marginReturn on total capitalReturn on equityReturn on average total assetsReturn on invested capital (ROIC)Return on capital employed (ROCE) Return on investment (ROI)Return on salesCash flow marginReinvestment rate (I)Working capital to salesSales to inventoryProperty, plant and equipment to salesFixed asset turnoverCurrent asset turnoverTotal asset turnoverReceivables turnoverDays sales outstanding (DSO)Days payables outstandingInventory turnoverPayables turnoverCapital turnover

5.15.25.35.45.55.65.75.85.95.105.115.125.135.145.155.165.175.185.195.205.215.225.235.24

5.616263646566676869707172737475767778798081828384

6.16.26.36.46.56.66.76.86.96.106.116.126.136.146.156.166.176.186.196.206.21

Equity ratioTotal liabilities to total capital (leverage)Total liabilities to total equity (gearing)Leverage structureDynamic gearingWorking capitalQuick ratioCurrent ratioAsset structureAsset intensityTotal current assets to total assetsFinancial strengthReinvestment rate (II)Depreciation rateNon-current assets to total stockholder’s equityGolden financing ruleEquity to assets ratioCurrent liabilities to salesAccounts receivable to current liabilitiesOperating income to current liabilitiesInterest coverage

Liquidity ratios 6.87888990919293949596979899100101102103104105106107

Earnings per share (EPS), basicEarnings per share (EPS), dilutedPrice earning ratio (P / E)Price earnings growth ratio (PEG)EBITDA per shareCash flow per shareMarket capitalizationMarket capitalization to cash flowMarket capitalization to salesPrice to book (total equity)Net asset value per shareEnterprise value (EV)Enterprise value / EBITEnterprise value / EBITDA

7.17.27.37.47.57.67.77.87.97.107.117.127.137.14

7.111112113114115116117118119120121122123124

Ratios for corporate valuation

Table of content

Pay out ratioDividend per shareDividend yieldBetaCost of equityCost of debtWeighted average cost of capital (WACC)Discounted cash flow method (DCF)Economic value added (EVA)Market value added (MVA)

7.157.167.177.187.197.207.217.227.237.24

7.125126127128129130131132133134

Ratios for corporate valuation

Table of content

21

Operating income / EBIT2.1

Formula Sample calculation

Net sales 14,019– Cost of sales 5,004– Operating expenses 7,857+ Other operating income 294 = Operating income / EBIT = 1,452

Explanation

Operating income respectively operating profit is also known as EBIT, which stands for “earnings before interest and taxes”. It is generally used to assess the company’s earnings position, in particular in international comparisons. However, EBIT is not only pure earnings before interest and taxes as it is referred to by many people, but in more precise terms it is the operating re-sult before the financial and thus investment result, which may have a major impact on the pre-tax earnings depending on the respective company.

• Allows assumptions to be made about pure operating activities

• Industry-wide comparisons of operating income are possible, in particular when other ratios are also considered (e.g., revenues)

• Distortions from tax effects are not included

• Used internationally

• Only meaningful when consi-dered together with other indicators (e.g., revenues)

• Interest income, which may not be included in EBIT, can be part of operating income (income from financing activities, e.g., financing installments)

• Income which may not stem from the operating activities may also be included in this figure (rental income)

Advantages Disadvantages

87

Equity ratio6.1

Formula

Total stockholder’s equity _____________________

Total liabilities and stockholder’s equity × 100%

Sample calculation

5,457 ______

10,134 × 100% = 53.85%

Explanation

The equity ratio describes the relationship between stockholder’s equity and total capital, i.e. total liabilities and stockholder’s equity. As a rule, the more equity a company has available the better its credit-worthiness, the higher its financial stability and the more independent the company is from lenders. However, as equity is more expensive than debt (see also WACC, page 131), a high equity ratio depresses the return on capital employed. When calculating the equity ratio, we can either use total capital or, as generally practiced by financial analysts in particular when calculating the costs of capital, only use the sum of total equity and interest-bearing debt.

• Shows the type and composition of capital

• Easy to calculate

• Serves to calculate the debt level (leverage) and allows assumptions to be made about a company’s stability

• Helpful in same-industry com-parisons as an indicator for a company’s relative financial strength

• Depends heavily on industry and valuations

• Hidden assets reduce the actual value of equity

• Balance sheet figures are now often being replaced by frequently used market values (e.g., use of market capitaliza-tion instead of balance sheet equity to calculate costs of capital)

Advantages Disadvantages