Category Archives for "Financial Ratio Analysis"

Operating Profit Margin Ratio

This is an all-in-one guide on how to calculate Operating Profit Margin (OPM) ratio with detailed interpretation, example, and analysis. You will learn how to use its formula to examine a business operating performance.

Definition - What is Operating Profit Margin Ratio?

Like the net profit ratio, the operating profit margin ratio, also known as net operating profit percentage, allows you to examine a company’s profitability and efficiency in more detail, where generating profits from revenues is concerned.

But while both calculations measure profits against costs, the operating margin ratio scrutinizes a narrower scope of operational and overhead expenses, excluding such costs as interest payments and taxes.

This ratio will give you a middle-of-the-road view of how effective a company is at managing and controlling its expenditures as a whole.

While less refined than including a company’s total expenses, the operating margin ratio does better reflect a firm’s ability to control overall operational costs than calculations that consider only those expenses directly related to the creation or sale of goods or services.

As a percentage measurement, the operating margin ratio shows you how much of each dollar in sales translates into profits from a firm’s regular business operations, as opposed to from other income sources, such as the sale of an asset.

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Current Ratio

This is an advanced guide on how to calculate Current Ratio with detailed analysis, interpretation, and example. You will learn how to use this ratio's formula to draw a clearer picture of a company's liquidity.

Definition - What is The Current Ratio?​

One of the mathematical formulas you can use to determine a company’s liquidity, or its ability to pay off its short-term debts, is the current ratio.

Unlike the quick ratio and the more narrowly focused cash coverage ratio that only consider easily "cashable", or quick assets, this ratio takes a broader view of liquidity by including such assets as inventory in its calculation.

By measuring all of a company’s current assets against its current liabilities, you can arrive at a figure that will indicate how likely that company is to have enough resources to support its debts over the next year.

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Asset Coverage Ratio

This is an in-depth guide on how to calculate Asset Coverage Ratio with through interpretation, analysis, and example. You will learn how to use its formula to evaluate a firm's debt repayment capacity.

Definition - What is Asset Coverage Ratio?

When you’re considering investment in a company, there are a variety of tools available to you to determine whether it is worthwhile or not.

One of these tools is the Asset Coverage Ratio which is the measurement used to determine a firm's ability to pay off or cover its debt given its assets.

This is an especially important ratio in helping you to understand whether or not the company’s assets can cover any debts owed to you and other investors.

If a company is unable to pay its debts, selling off these assets might be the only solution.

When analyzing the ratio, the broad consensus is the higher the coverage ratio, the better as it reflects the ability of the business to fulfill its debt obligations against its assets.

In using this ratio, analysts tend to take the view that for Utilities companies, the asset coverage ratio should be at least 1.5 whereas industrial companies should have a ratio of at least 2.

Anything below these respectively would signal that the company does not have the ability to pay back all of its debts given its assets.

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Days Sales Outstanding

This is an advanced guide on how to calculate Days Sales Outstanding with in-depth interpretation, analysis, and example. You will learn how to utilize its formula to evaluate a firm's efficiency.

Definition - What is Days Sales Outstanding?

The days sales outstanding (DSO), also known as the average collection period, is a measure that helps determine if the business can efficiently collect cash made from its sales.

In short, it measures how long it would take, in days, for a company to get the payments from the sales that have been credited to their account.

This ratio can help determine if a company needs to find a solution to improve their collection strategy.

A high revenue may seem like an indicator of success, but unless a company can successfully turn these credits into actual cash, they don't have any actual returns to use for their operations and investments.

It’s worth noting that investing in a company with no cash, and has a high amount of accounts receivable could be big trouble.

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