Financial ratios and discounted cash flow (DCF) analysis provide a deep understanding of how well a business performs and what it's worth. Below are essential ratios every investor and analyst should know—each with a clear definition and easy-to-use formula.
Try Financial Calculators📊 Liquidity Ratios
1) Current Ratio
Shows how well a company can meet short-term obligations using its short-term assets. A higher ratio means stronger liquidity and financial health.
2) Quick (Acid-Test) Ratio
A stricter measure of liquidity that excludes inventory from current assets, focusing only on the most liquid resources.
⚖️ Leverage Ratios
1) Debt Ratio
Indicates what proportion of total assets is financed through debt. A lower ratio generally reflects lower financial risk.
2) Debt-to-Equity Ratio
Compares total debt to total shareholder equity to show how leveraged a company is. High leverage increases both potential returns and risk.
💰 Profitability Ratios
1) Net Profit Margin
Reveals how much profit remains from every dollar of sales after expenses. High margins indicate strong cost management and pricing power.
2) Return on Assets (ROA)
Shows how efficiently a company uses its assets to generate profit. Ideal for comparing companies across capital-intensive industries.
3) Return on Equity (ROE)
Measures the profitability generated from shareholders’ invested capital. A higher ROE means greater efficiency in generating returns.
⚙️ Efficiency Ratios
1) Asset Turnover
Shows how efficiently a company uses its assets to generate sales. A higher ratio reflects better utilization of assets.
2) Inventory Turnover
Indicates how quickly inventory is sold and replaced. Higher turnover implies better inventory management and lower holding costs.
📈 Market Value Ratios
1) Price-to-Earnings (P/E) Ratio
Shows how much investors are willing to pay per dollar of earnings. High P/E ratios may reflect growth expectations or overvaluation.
2) Market-to-Book Ratio
Compares market value to book value, highlighting how investors perceive the company's net asset worth.
3) Dividend Yield
Represents the percentage return a shareholder earns from dividends relative to the stock price.
💵 Cash Flow Ratios
1) Operating Cash Flow Ratio
Measures the ability of operating cash flows to cover current liabilities. It reflects real cash strength rather than accounting earnings.
2) Free Cash Flow (FCF)
Shows how much cash remains after essential capital expenditures, available for debt repayment, dividends, or expansion.
🧮 Investment Valuation Ratios
1) Earnings per Share (EPS)
Indicates profit attributed to each share of common stock. A growing EPS signals improving profitability.
2) Price-to-Sales (P/S)
Useful for evaluating companies with unstable profits; it compares market price to revenue per share.
💡 Discounted Cash Flow (DCF) Analysis
1) Discount Factor
Brings future cash flows to present value using a chosen discount rate.
2) Present Value (PV)
Calculates today’s value of future payments or income streams.
3) Net Present Value (NPV)
Determines whether a project or investment adds value after discounting all cash inflows and subtracting the initial outlay.
4) Terminal Value (Perpetuity Growth Method)
Estimates value beyond the forecast period assuming a constant growth rate.
5) Terminal Value (Exit Multiple Method)
Calculates terminal value using an industry-based valuation multiple such as EBITDA.
6) Enterprise Value (EV)
Represents the total value of a company’s operations regardless of capital structure.
7) Equity Value
The residual value available to shareholders after deducting debt and adding cash.
🧠 Final Thoughts
Combining financial ratios with DCF analysis provides a complete picture of a company’s performance and intrinsic value.
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