Financial Ratios Flashcards
Fixed asset intensity
Fixed assets
——————- * 100
Total assets
Fixed asset = Intangible assets + PPE + leased assets
The higher the asset intensity, the longer financial funds are locked up and – as a rule – the higher the associated fixed costs. The smaller this ratio, the less capital is tied-up over the long term. The ratio provides information on the company’s ability to adapt to changing market conditions. When considering the asset intensity, the company’s respective industry must also be considered.
Current asset intensity
Current assets
——————- * 100
Total assets
It shows the percentage of total capital which is locked-up in current assets. A high ratio is generally to be viewed positively, as current assets can be liquidated quickly. However, an extremely high ratio can indicate excessive stock levels, which push up warehousing costs. More detailed analysis of the current assets should cover the level of receivables and inventories in greater detail.
Asset Structure
Non-current assets
—————————– * 100
Current assets
Both ratios show a company`s stability or flexibility, however typical asset structures in the respective industry should also be considered.
A low asset structure ratio can mean two things:
- A low level of fixed assets allows the company to react more flexibly to changes on the market and fixed costs are lower due to shorter capital lock-up period for all assets.
- A company is working with assets that have already been written off. This allows to assume that the technology used is out of date.
Fixed asset structure
Fixed asset
—————— * 100
Current assets
Equity ratio (intensity)
Equity
—————— * 100
Total capital
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, a high equity ratio, depresses the return on capital employed.
Debt (leverage) ratio (intensity)
Total liabilities (or Debts)
—————— * 100
Total capital
The debt ratio also allows assumptions to be made about a companys financial stability. The growth of this ratio should always be considered together with the companys assets. It these include hidden liabilities as a result of lower market values, this has a negative impact on the leverage ratio.
Leverage structure
Current liabilities
—————— * 100
Total liabilities
This ratio expresses what percentage of total liabilities will acutally lead to a cash outflow to external creditors on a short-term basis. Companies in danger of insolvency show an increased percentage of leverage structure that solvent companies. For an ongoing analysis the maturity and conditions of all liabilities components should be taken into account.
Debt gearing ratio (static)
Total liabilities
—————— * 100
equity
This ratios shows the relationship between a companys debt and equity financing. In general, the higher the gearing ratio, the more dependent a company is on external creditors. However, the gearing ratio should never be considered alone, but always in connection with the companys earnings position (leverage-effect!)
„Golden balance sheet rule“ (Investment coverage)
Fixed assets
—————— <= 1
Total equity
Fixed asset = Intangible assets + PPE
This ratio demands that the capital lock-up period does not exceed the period for which the capital has been made available, i.e. that the assets tied in to the company for the long-term are covered by long- term capital. It a company does not uphold this rule, it may become forced to sell assets in order to service current liabilities. Long-term capital can be defined exclusively by equity or in broader sense with non-current liabilities.
Asset coverage ratio (Principle of matching maturities)
Total equity
—————————— * 100
Fixed assets
Fixed asset = Intangible assets + PPE
This ratio is the counterpart to the investment coverage ratio above. It answers the question of the extent to which the fixed assets, which should be available to the company over the long term, are covered by equity that remains in the company for an equally long term. The higher the ratio is, the better, as this means that parts of the current assets are also being financed long-term.
“Golden financing rule” (Principle of matching maturities)
Current liabilities
—————— <= 1
Current assets
These ratios state that the terms between obtaining and repaying capital on the one hand and the use of capital on the other should be in line with each other. According to this rule, capital may not be tied up in assets for a longer period that the capital is available to the company. If a company finances a long-term investment (e.g. a machine) with short-term financing, the loan become due before the income reuiqred to repay the loan has been generated.
Cash ratio
(Liquidität 1. Grades)
Cash & cash equivalent
—————— * 100
Current liabilities
All ratios are often used for evaluating a companys creditworthiness. They show the relationship between liquid assets to payment commitments. Liquid or current assets include cash and cash equivalents, marketable securities, total receivables and total inventory etc. The various ratios show the extent to which the current liabilities are covered by current assets.
Quick ratio (Liquidität 2. Grades)
(Current assets – inventories)
—————— * 100
Current liabilities
Bankers use the quick ratio to determine how quickly a company can pay off its current liabilities in case assets need to be converted into cash.
The quick ratio differs from the current ratio in that it excludes inventory. The logic behind this is that while inventory may have been paid for and has value, it may not necessarily be converted into cash quickly. As a rule of thumb, the quick ratio should exceed 100%, thus current liabilities are covered by the companys cash position and its total receivables.
Current ratio (Liquidität 3. Grades)
Current assets
—————— * 100
Current liabilities
As a rule of thumb, a current ratio of less than 100% is being regarded as threatening the company`s existence.
Working Capital
Current Assets - Cash and cash equivalents - Current, non-interest-bearing liabilities
It expresses the proportion of current assets working for a company (i.e. that is generating sales), without generating capital costs in the closer sense of the word. It is thus the portion of current assets with long-term financing. The higher the working capital, the more secure the liquidity position. From an analyst ́s perspective, negative working capital may be viewed positively, as suppliers pre-finance the companys sale.
