Posts Tagged ‘financial ratios’

Return on Equity

I’ve wondered how many companies calculate their return on equity. It’s a revealing statistic of just how well the owners’ investment is performing. Read the rest of this entry »

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Financial Measurements that Matter

In business we typically measure a lot of things, but when it comes to financial information are we making and utilizing financial measurements that matter?

What Does That Mean?

To understand what I’m referring, let’s look back at the posting Some Key Financial Indicators where we briefly considered Read the rest of this entry »

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Actual Company Debt

Do you really know your actual company debt? This may seem like a silly question, but there is more to it than you may think. Let me explain.

Leases

There is a proposal from U.S. and international accounting regulators to change how a company should record and account for what is referred to as operating leases. Here I just want to consider the impact on the lessee. First, let’s look at some Read the rest of this entry »

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Not All Cash Measurements Apply

The past few weeks we have looked at several financial performance ratios and financial terms. Among these were a number related to cash measurements. The links below will take you to some of those articles:

This is not intended as an all-encompassing list of ways to evaluate cash, but rather is a list of some of the key and most common ones.

Your Company

I encourage you to get familiar with the terms above and how the calculations are made for each of them. Once you have done that, consider the cash measurements that mean the most to your company. For example, if you have Read the rest of this entry »

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Cash Flow Coverage Ratios

There are several cash flow coverage ratios. Let’s look at two that impact all sizes of companies, including small ones.

Some Preliminaries

The reason I will only discuss two of these ratios is that some of the others rarely impact small companies that are privately and/or closely owned. In both of the ratios we will look at OCF stands for operating cash flow. As a reminder, OCF is calculated as:

Net Income adjusted for non-cash charges and changes in current assets and liabilities. Again for this calculation net income is exclusive of Read the rest of this entry »

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Free Cash Flow Versus Operating Cash Flow

I’ve been writing recently about cash flow, specifically in regards to important ratios to interpret it. The free cash flow to operating cash flow ratio is a useful measurement. Let’s see how it is calculated and what it means.

First Some Definitions

Generally free cash flow (abbreviates as FCF) is considered to be operating cash flow minus capital expenditures. (See Importance of Free Cash Flow)

Operating cash flow (OCF) is calculated as net income adjusted for non-cash charges and changes in current assets and liabilities. (See Operating Cash Flow Defined) In this calculation net income does not show the effect of interest and income taxes, so it is actually earnings before interest and income taxes (Abbreviated EBIT).

Calculating the Free Cash Flow to Operating Cash Flow Ratio

The formula for calculating the free cash flow to operating cash flow ratio, expressed as a percentage is: Read the rest of this entry »

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Understanding the Operating Cash Flow to Sales Ratio

In my last posting I defined what operating cash flow is and how to calculate it. Now I want to see it in relation to sales.

Why in Relation to Sales

Since selling is the primary activity of a company for producing cash flow, the relationship of operating cash flow to sales is a meaningful one.

Operating Cash Flow to Sales Ratio Defined

To calculate the operating cash flow to sales ratio, which is expressed as a percentage, the following formula is used (where OCF stands for operating cash flow):

Operating Cash Flow to Sales Ratio = OCF / Sales Read the rest of this entry »

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Understanding the Debt Ratio

Most of my recent postings have concerned how businesses are financed and how to measure the returns on those investments. Understanding the debt ratio will help you better understand the financing of a business.

What is the Debt Ratio?

The formula for calculating the debt ratio is:

Debt Ratio = Total Liabilities / Total Assets

(Note that this is expressed as a percentage)

Using a sample balance sheet from an earlier posting, let’s see that calculation. Read the rest of this entry »

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What is Return on Capital Employed?

The return on capital employed is probably not a metric that many small companies calculate, but it can be very revealing about financial health. In some prior postings we looked at several ways of measuring a business’s return. Among those were return on assets and return on equity (see Two Measures of Financial Return). We also look at return a different way in the posting Debt Coverage. See those postings if you want to know more about these very useful measurements.

It is important to understand that there are two main sources of capital; one is Read the rest of this entry »

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The Cash Conversion Cycle

If you read my postings on a regular basis I may sound like a broken record with how much I focus on cash. But again, as I’ve said before, “Profit is nothing until it is converted to cash.” See Cash Flow – The Bottom Line. Now I want to delve into how efficiently we convert financial activity to cash.

Cash Conversion Cycle Formula

First we need to identify some abbreviations and definitions: Read the rest of this entry »

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