10 Financial Terms of Investing explained π§΅π§΅
1) EBITDA
2) PAT
3) ROE
4) ROCE
5) D/E Ratio
6) Acid Test Ratio
7) Working Capital Turnover
8) PE
9) PS Ratio
10) Interest Coverage
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1) EBITDA
2) PAT
3) ROE
4) ROCE
5) D/E Ratio
6) Acid Test Ratio
7) Working Capital Turnover
8) PE
9) PS Ratio
10) Interest Coverage
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1) Earnings before Interest Tax Depreciation & Amortization (EBITDA) margin -
It shows how efficiently an organization is operating.
Ratio = EBDITA / Net Sales
EBITDA = Operating Income (EBIT) + Depreciation + Amortization
EBDITA Margin of 10% and more is considered good.
It shows how efficiently an organization is operating.
Ratio = EBDITA / Net Sales
EBITDA = Operating Income (EBIT) + Depreciation + Amortization
EBDITA Margin of 10% and more is considered good.
2) PAT Margin -
Its similar to EBDITA Margin, the only difference is - it is calculated after taxes.
PAT Margin = [PAT/Total Revenues]
A good margin will vary considerably by industry, but as a general rule of thumb, 5% is low, 10% is avg and 20% can be considered high
Its similar to EBDITA Margin, the only difference is - it is calculated after taxes.
PAT Margin = [PAT/Total Revenues]
A good margin will vary considerably by industry, but as a general rule of thumb, 5% is low, 10% is avg and 20% can be considered high
3) Return on equity
It indicates how much return the shareholders are making over their initial investment in the company
ROE - [Net Profit / Shareholders Equity* 100]
Generally 15%+ ROE can be considered to invest in a company with a good cashflow and low debt.
It indicates how much return the shareholders are making over their initial investment in the company
ROE - [Net Profit / Shareholders Equity* 100]
Generally 15%+ ROE can be considered to invest in a company with a good cashflow and low debt.
4) ROCE - Return on Capital Employed
Return on Capital employed indicates the overall return the company generates considering both the equity and debt
ROCE = [Profit before Interest & Taxes / Overall Capital Employed]
ROCE of 15% and above is considered good
Return on Capital employed indicates the overall return the company generates considering both the equity and debt
ROCE = [Profit before Interest & Taxes / Overall Capital Employed]
ROCE of 15% and above is considered good
5) Debt to Equity Ratio -
It can be measured directly from Balance sheet - [Total Debt/Total Equity]
D/E Ratio < 1 = Safe
1 < D/E < 2 = Moderate
D/E > 2 Aggressive and risky
Lower is better, means funds can be arranged easily
But then again depends on Sector to Sector
It can be measured directly from Balance sheet - [Total Debt/Total Equity]
D/E Ratio < 1 = Safe
1 < D/E < 2 = Moderate
D/E > 2 Aggressive and risky
Lower is better, means funds can be arranged easily
But then again depends on Sector to Sector
6) Interest coverage Ratio -
The interest coverage ratio is a debt and profitability ratio used to determine how easily a company can pay interest on its outstanding debt.
IC Ratio - [Earnings before Interest and Tax / Interest Payment]
Higher is better
The interest coverage ratio is a debt and profitability ratio used to determine how easily a company can pay interest on its outstanding debt.
IC Ratio - [Earnings before Interest and Tax / Interest Payment]
Higher is better
7) Acid Test Ratio -
The acid-test ratio is a measure of how well a company can satisfy its short-term (current) financial obligations.
Ratio - {Currents Assets - Inventories}/Current Liabilities
Ideally, a business should have an acid-test ratio of at least 1:1
The acid-test ratio is a measure of how well a company can satisfy its short-term (current) financial obligations.
Ratio - {Currents Assets - Inventories}/Current Liabilities
Ideally, a business should have an acid-test ratio of at least 1:1
8) Working Capital Turnover -
Working capital turnover ratio indicates how much revenue the company generates for every unit of working capital.
Working Capital Turnover = [Revenue / Average Working Capital]
Higher the working capital turnover ratio the better it is
Working capital turnover ratio indicates how much revenue the company generates for every unit of working capital.
Working Capital Turnover = [Revenue / Average Working Capital]
Higher the working capital turnover ratio the better it is
9) P/S - Price/Sales Ratio
This ratio compares the stock price of the company with the companyβs sales per share
Price to sales ratio = Current Share Price / Sales per Share
One can easily find overvalued and undervalued stocks using this ratio and by comparison with peers
This ratio compares the stock price of the company with the companyβs sales per share
Price to sales ratio = Current Share Price / Sales per Share
One can easily find overvalued and undervalued stocks using this ratio and by comparison with peers
10) Price to Earning (P/E) Ratio
P/E = Stock Price/ Earning per Share
P/E indicates how expensive or cheap the stock is trading at - lower is better
Compare PE of similarly placed companies to find undervalued gems.
P/E = Stock Price/ Earning per Share
P/E indicates how expensive or cheap the stock is trading at - lower is better
Compare PE of similarly placed companies to find undervalued gems.
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