Category Archives for "Financial Ratio Analysis"

Return on Capital Employed Ratio

This is an in-depth guide on how to calculate Return on Capital Employed (ROCE) ratio with detailed analysis, interpretation, and example. You will learn how to use its formula to assess a firm's profitability.

Definition - What is Return on Capital Employed Ratio?​

One of the many tools you can use to measure a company’s profitability is the return on capital employed or ROCE ratio.

This ratio compares a firm’s net earnings from operations to the amount of its capital employed, in order to determine how much profit is being generated from each dollar of that capital.​

The capital employed figure indicates the amount of capital investment that’s needed for a particular business to operate successfully.

In other words, it represents the combined amount of a company’s shareholder equity, plus its long-term liabilities.

Because it considers a company’s long-term debt obligations, the ROCE ratio takes a longer view of the firm’s continued financial viability.

Instead of simply giving you a picture of how efficiently the firm’s current assets or shareholder investment is producing a profit, the ratio gauges profit performance based on both equity and debt.

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Quick Ratio

This is an ultimate guide on how to calculate Quick Ratio with detailed analysis, interpretation, and example. You will learn how to utilize this ratio's formula to assess a business liquidity.

Definition - What is Quick Ratio?​

As one of the many financial ratios you can use to analyze a company’s financial standing and performance, the quick ratio will help you to gauge a company’s asset liquidity.

This particular liquidity ratio is also known as the acid test because, historically speaking, acid was at one time used to differentiate pure, valuable gold from worthless metal.

By measuring the combined total of an organization’s cash and cash equivalents against its current liabilities, you can determine its ability to fund its short-term debts using only those quick assets that can be easily converted into cash.

Similar to the current ratio, the higher the quick asset ratio value, the better a position the company is in.

The figures you’ll need to compute the quick assets ratio can usually be found on a company’s balance sheet.

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Fixed Charge Coverage Ratio

This is an ultimate guide on how to calculate Fixed Charge Coverage Ratio with thorough analysis, example, and explanation. You will learn how to use its formula to evaluate a company's solvency.

Definition - What is Fixed Charge Coverage Ratio?

The fixed charge coverage ratio is a useful solvency ratio that tells us about the capability of the firm to repay its fixed charges when they become due.

To understand the importance of this ratio, let us first look at what fixed charges could be.

A fixed charge can be any recurring expense such as mortgage payments, insurance, salaries, etc. To remain in business, a firm needs to be able to meet these expenses.

This ratio is especially important for firms with long equipment leases. Lease payments can be found on the balance sheet of a company (usually found in the footnotes).

The ratio tells us how many times can the company meet its fixed expenses per year.

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Cash Flow to Sales Ratio

This is an ultimate guide on how to calculate Operating Cash Flow to Sales Ratio with detailed interpretation, analysis, and example. You will learn how to use its formula to assess a company's efficiency.

Definition - What is Operating Cash Flow to Sales Ratio?

The operating cash flow to sales ratio (OCF/S) is the ratio of a company's operating cash flow and its net sales.

This ratio is used to compare a company’s sales revenues with its cash flow from operations, thereby revealing how well the company can generate cash flows from its sales.

It is important for a business to root its success not only in sales or revenue figures, but also in cashflow. This is especially true for companies with long-standing receivables.

As an investor, you don’t want to invest in a company that has cash problems since cash is one of the most important factors that creates “value” in a business.

While seeing an exciting swell of figures in the revenue line may make you want to turn your money in immediately, you need to inspect if these figures have actually materialized into something tangible and usable by the business.

This is where you want to check the operating cash flow figure, which indicates how the money flows into a business from its operating activities.

The OCF to sales ratio is a very useful metric for evaluating a company’s efficiency.

Not only will it help you understand how a business generates cash flow from its sales, but this ratio also will tell you if that business has any problems with its accounts receivable.​

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