Financial Ratios Interpretations

Current ratio interpretation
What counts as a “good” current ratio will depend on the company's

industry and historical performance. As a general rule, however, a
current ratio below 1.00 could indicate that a company might struggle to
meet its short-term obligations, whereas ratios of 1.50 or greater would
generally indicate ample liquidity.
Quick Ratio interpretation

For instance, a quick ratio of 1.5 indicates that a company has $1.50 of
liquid assets available to cover each $1 of its current liabilities.
Receivable Turnover Interpretation

The accounts receivable turnover ratio is an accounting measure used to
quantify a company's effectiveness in collecting its receivables or money
owed by clients.
A high receivables turnover ratio may indicate that a company’s

collection of accounts receivable is efficient and that the company has a
high proportion of quality customers that pay their debts quickly.
A low receivables turnover ratio could be the result of inefficient

collection, inadequate credit policies, or customers who are not
financially viable or creditworthy.
Inventory Turnover Interpretation

Inventory turnover measures how many times in a given period a
company is able to replace the inventories that it has sold. A slow
turnover implies weak sales and possibly excess inventory, while a
faster ratio implies either strong sales or insufficient inventory.
Debt Ratio Interpretation
The debt ratio measures the amount of leverage used by a company

in terms of total debt to total assets. A debt ratio of greater than 1.0
(100%) means a company has more debt than assets, while one of less
than 100% indicates that a company has more assets than debt.
Equity Ratio Interpretation

A low equity ratio means that the company primarily used debt to acquire
assets, which is widely viewed as an indication of greater financial risk.
Equity ratios with higher value generally indicate that a company's
effectively funded its asset requirements with a minimal amount of debt.
For example, ABC International has total equity of $500,000 and

total assets of $750,000. This results in an equity ratio of 67%, and
implies that 2/3 of the company's assets were paid for with equity.
Debt-to-equity ratio interpretation

Your ratio tells you how much debt you have per $1.00 of equity. A
ratio of 0.5 means that you have $0.50 of debt for every $1.00 in equity.
A ratio above 1.0 indicates more debt than equity. So, a ratio of 1.5
means you have $1.50 of debt for every $1.00 in equity.
Times interest earned interpretation
Times interest earned ratio measures a company's ability to continue to

service its debt. It is an indicator to tell if a company is running into
financial trouble. A high ratio means that a company is able to meet its
interest obligations because earnings are significantly greater than
annual interest obligations.
For example, a ratio of 5 means the business is able to meet the total
interest payments owed on its outstanding, long-term debt five times
over, or that the business income is five times higher than the interest
expenses owed for the year.
Gross profit rate interpretation
The ratio indicates the percentage of each dollar of revenue that the
company retains as gross profit. A gross profit margin ratio of 65% is
considered to be healthy.
For example, if the ratio is calculated to be 20%, that means for

every dollar of revenue generated, $0.20 is retained while $0.80 is
attributed to the cost of goods sold.
Operating profit margin interpretation
A higher operating margin indicates that the company is earning enough

money from business operations to pay for all of the associated costs
involved in maintaining that business. For most businesses, an operating
margin higher than 15% is considered good.
For example, a 15% operating profit margin is equal to $0.15

operating profit for every $1 of revenue.
Net profit margin interpretation

Indicates how much net income a company makes with total sales
achieved. A higher net profit margin means that a company is more
efficient at converting sales into actual profit.
Good margin will vary considerably by industry, but as a general rule of

thumb, a 10% net profit margin is considered average, a 20% margin is
considered high (or “good”), and a 5% margin is low.
If a company has a 20% net profit margin, for example, that means
that it keeps $0.20 for every $1 in sales revenue.
Return on investment interpretation
According to conventional wisdom, an annual ROI of approximately 7%

or greater is considered a good ROI for an investment in stocks.
If you decided to buy 1,000 shares of a stock at $10 each, then sold
those a year later for $12 a piece, you've made $12 for every $10 you
spent, or $1.20 for every $1. In this case, your return on investment is
20%, because you made back your initial investment plus an extra 20%.
Return on equity interpretation
It tells common stock investors how effectively their capital is being

reinvested. For example, a company with high return on equity (ROE)
is more successful in generating cash internally. Thus, investors are
always looking for companies with high and growing returns on common
equity.
ROEs of 15–20% are generally considered good.
Earnings per share interpretation
Earnings per share (EPS) ratio measures how many dollars of net

income have been earned by each share of common stock during a
certain time period. It is computed by dividing net income less preferred
dividend by the number of shares of common stock outstanding during
the period. It is a popular measure of overall profitability of the company
and is expressed in dollars.
There is no rule of thumb to interpret earnings per share of a company.
The higher the EPS figure, the better it is. A higher EPS is the sign of
higher earnings, strong financial position and, therefore, a reliable
company for investors to invest their money.
Price-earnings ratio interpretation
The price to earnings ratio indicates the expected price of a share

based on its earnings. As a company's earnings per share being to
rise, so does their market value per share. A company with a high P/E
ratio usually indicated positive future performance and investors are
willing to pay more for this company's shares.
A “good” P/E ratio isn't necessarily a high ratio or a low ratio on its own.
The market average P/E ratio currently ranges from 20-25, so a higher
PE above that could be considered bad, while a lower PE ratio could be
considered better.
Dividend yield ratio interpretation
The dividend yield is a financial ratio that tells you the percentage of a

company's share price that it pays out in dividends each year. For
example, if a company has a $20 share price and pays a dividend of $1
per year, its dividend yield would be 5%.
A good dividend yield will vary with interest rates and general market
conditions, but typically a yield of 4 to 6 percent is considered quite
good. A lower yield may not be enough justification for investors to buy a
stock just for the dividend income.
Dividend payout ratio interpretation
It is the amount of dividends paid to shareholders relative to the total

net income of a company. For example, let's assume Company ABC
has earnings per share of $1 and pays dividends per share of $0.60. In
this scenario, the payout ratio would be 60% (0.6 / 1).
So, what counts as a “good” dividend payout ratio? Generally speaking,
a dividend payout ratio of 30-50% is considered healthy, while anything
over 50% could be unsustainable.
Book value per share interpretation
For example, if the BVPS is $20 per share and the market value of the
same common share is $30 per share, the investor can find out the ratio
of price to book value. Price to Book Value Ratio = Price Per
Share / Book Value Per Share read more as = Price / Book Value =
$30 / $20 = 1.5.
The price-to-book (P/B) ratio has been favored by value investors for
decades and is widely used by market analysts. Traditionally, any value
under 1.0 is considered a good P/B value, indicating a potentially
undervalued stock. However, value investors often consider stocks with
a P/B value under 3.0. It is important to note that it can be difficult to
pinpoint a specific numeric value of a "good" P/B ratio when determining
if a stock is undervalued and therefore, a good investment. Ratio
analysis can vary by industry, and a good P/B ratio for one industry may
be a poor ratio for another.

Financial Ratios Interpretations

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Current ratio interpretation

What counts as a “good” current ratio will depend on the company's

Quick Ratio interpretation

Receivable Turnover Interpretation

A high receivables turnover ratio may indicate that a company’s

A low receivables turnover ratio could be the result of inefficient

Inventory Turnover Interpretation

The debt ratio measures the amount of leverage used by a company

Equity Ratio Interpretation

For example, ABC International has total equity of $500,000 and

Debt-to-equity ratio interpretation

Times interest earned interpretation

Times interest earned ratio measures a company's ability to continue to

For example, if the ratio is calculated to be 20%, that means for

Operating profit margin interpretation

A higher operating margin indicates that the company is earning enough

For example, a 15% operating profit margin is equal to $0.15

Net profit margin interpretation

Good margin will vary considerably by industry, but as a general rule of

Return on investment interpretation

According to conventional wisdom, an annual ROI of approximately 7%

Return on equity interpretation

It tells common stock investors how effectively their capital is being

Earnings per share (EPS) ratio measures how many dollars of net

Price-earnings ratio interpretation

The price to earnings ratio indicates the expected price of a share

Dividend yield ratio interpretation

The dividend yield is a financial ratio that tells you the percentage of a

It is the amount of dividends paid to shareholders relative to the total

Book value per share interpretation

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