Financial Ratios
Price Ratios
Pricetoearnings ratio (P/E)
= Market price per share/Normalized Earnings per share (EPS) As a general rule one should avoid buying a stock when it's P/E is greater than it's normalized earnings growth rate. It should be noted that market capitalization and thus price per share do not take into account debt. As such many investors favour EV as it considers the overall capital structure of a company. Normalized earnings should be adjusted to account for nonrecurring items, any interest expenses owed on convertible bonds and fluctuations present in the business cycle. Median by Sector Sector P/E Ratio (Longterm Median) Consumer Discretionary 19.9x Consumer Staples 24.9x Energy 19.6x Financials 18.5x Healthcare 34.2x Industrials 25.0x Information Technology 29.9x Materials 24.5x Telecom 18.6x Utilities 24.5x Pricetosales ratio(P/S)
= Market price per share/ Revenue per share(TTM) P/S is useful for valuing earlystage, cyclical and turnaround companies where earnings may not be present. A P/S of < 1 indicates a company is selling for less than it's (TTM) revenue. Median by Sector Sector P/S Ratio (Longterm Median) Consumer Discretionary 1.0x Consumer Staples 1.3x Energy 1.7x Financials 3.5x Healthcare 5.1x Industrials 1.2x Information Technology 2.4x Materials 1.4x Telecom 1.6x Utilities 2.3x EV/EBIT Ratio
= Enterprise Value(EV)/Earnings before interest and taxes Buffett's rule of thumb is reputed to be < 10 x pretax earnings when buying companies though this should not be a fixed assumption. From an examination of Buffett's writings and speeches the author concludes that primary focus is to attain a >10% rate of return on investment. Median by Sector Sector EV/Longterm Median EBIT Consumer discretionary 14x Consumer Staples 17.4x Energy 18.7x Financials N/a Healthcare 24.3x Industrials 17.5x Information Technology 22.1x Materials 17.1x Telecom 15.8x Utilities 18.9x Pricetoearnings to growth(PEG) ratio
= P/E ratio/Annual net income growth "The P/E ratio of any company that's fairly priced will equal its growth rate"  Peter Lynch. Thus a fairly valued company will have a PEG = 1 Median by Sector Sector PEG Ratio (Longterm Median) Consumer discretionary 1.1x Consumer Staples 1.8x Energy 0.5x Financials 1.2x Healthcare 0.9x Industrials 1.3x Information Technology 1.1x Materials 0.9x Telecom 1.2x Utilities 2.4x Pricetocashflow ratio
= Market price per share/Cash flow per share 
Pricetobook value ratio(P/B)
= Price per share/Book value per share The P/B ratio can be distorted by share buybacks and excessive debt and if tangible book value is used this ratio may not capture the value of intangible assets. Median by Sector Sector P/B Ratio (Longterm Median) Consumer Discretionary 2.0x Consumer Staples 2.7x Energy 1.3x Financials 1.5x Healthcare 3.8x Industrials 2.5x Information Technology 3.2x Materials 2.1x Telecom 2.2x Utilities 2.0x Earnings yield
= Earnings per share (EPS)/Price per share This is the inverse of the P/E ratio. EPS figures can be distorted by share buybacks and thus this should be considered when using both P/E and it's inverse Earnings yield. Aggregate figures such as Net Income and EBIT can be substituted to avoid these distortions. Dividend yield ratio
= Dividend per share/Price per share Ben Graham advised one should insist upon > 2/3 AAA bond yield (5 & 10 year recommended). In modern markets bonds and equities have become dislocated and thus this rule is no longer relevant. PricetoFree cash flow ratio(P/FCF)
= Market price per share/Free cash flow per share P/FCF subtracts capital expenditures from operating cash flow to obtain a stricter measure for valuation. This is done as CAPEX is required to maintain and expand a company's asset base which in turn maintains or expands it's free cash flow. EV/EBITDA Ratio
= Enterprise value/Earnings before interest, taxes, depreciation and amortization This ratio is useful for comparing companies which have differing debt servicing costs, tax obligations and rates of depreciation/amortization. Median by Sector Sector EV/Longterm Median EBITDA Consumer discretionary 9.4x Consumer Staples 12.5x Energy 10.6x Financials N/a Healthcare 16.3x Industrials 11.9x Information Technology 16.0x Materials 10.6x Telecom 6.4x Utilities 11.6x PricetoOperating Cash Flow
= Market price per share/Operating Cash flow per share Median by Sector Sector P/OCF (Longterm Median) Consumer discretionary 9.5x Consumer Staples 13.2x Energy 7.7x Financials 12.4x Healthcare 18.8x Industrials 14.1x Information Technology 19.5x Materials 11.1x Telecom 6.5x Utilities 9.6x Magic Formula Yield (Inverse of EV/EBIT)
= EBIT/EV This is a relative valuation used for comparison but >10% should be considered a minimum benchmark. 
Pricetogrowth flow ratio (Useful for companies with large R+D spending)
= Market price/(Net Income + Fwd 1 yr R+D costs) x 5 : Cheap x 1012 : Normal x >1520 : Expensive 
Modified PEG ratio
= (P/E ratio)/(Dividend yield + Growth rate) x 100 The original PEG ratio doesn't take into account dividends and as such may not be suitable for companies where a large part of their earnings are distributed to shareholders in the form of dividend payments . 
Profitability & Efficiency Ratios
Return on Equity ratio (ROE)
= Net Income/Shareholder's Equity ROE can be distorted by writedowns, share buybacks and excessive debt and thus this should be considered when using this ratio. 
Return on Assets ratio (ROA)
= Net Income/Total Assets 
Return on Capital Employed ratio (ROCE)
= Earnings before interest and tax(EBIT)/Capital employed(Total assets  Current Liabilities) 
Return on Invested Capital ratio (ROIC)
= (Net Income  Dividends)/Total Capital 
Free Cash FlowtoSales ratio (FCF/Sales)
= Free Cash Flow(FCF)/Sales If one is looking for companies which may possess some type of economic moat one should look for companies that consistently achieve > 10%. This could be an indicator that a moat is present. 
Return on Sales ratio (ROS)
= Net Income (Before Income and Tax)/Sales Return on sales is a useful measure of value for loss making companies such as turnarounds and startups where earnings are absent due to temporary problems or capital expenditure for growth. 
Cash Conversion Cycle
= Days Inventory Outstanding + Day Sales Outstanding  Days Payables Outstanding This is a relative figure, not an absolute. As such it should be used for comparison with historical and industrial averages. Accounts Receivable Turnover
= Annual Sales/Accounts Receivable 
Cash Return on Invested Capital (CROIC)
= Free Cash Flow/Invested Capital (Shareholder's Equity + Interest Bearing Debt + Short Term Debt + Longterm Debt) Jae Jun of Oldschoolvalue.com likes to see a figure growing or consistently above 13%. He suggests that > 13% is a sign that a company may possess some type of economic moat. Inventory Turnover
= Total Annual Sales/Cost of Inventory or = Cost of Goods Sold/Average Cost of Inventory The second method of calculating inventory turnover is more useful for comparison for two reasons. Firstly using COGS compensates for the fact that companies may have differing markup rates to sale price leading to an overstating of actual inventory turnover. Secondly using the average cost of inventory compensates for the fact that the sales of certain companies may be seasonal in nature. 
Liquidity & Financial Strength Ratios
Debt/Equity ratio (D/E)
= Total liabilities/Shareholder's equity Contrarian investor David Dreman thinks that <20% is a prudent figure. 
Total Debt/Capitalization ratio
= (Shortterm debt + Longterm debt)/(Shortterm debt + Longterm debt + Shareholder's equity) This ratio is more comprehensive than the standard D/E ratio as it considers the overall capital structure of a company. 
Current ratio
= Current assets/Current liabilities Companies with a current ratio < 1 have a negative working capital position. As a general rule I consider a current ratio of > 1.5 as a minimum requirement for desired liquidity though exceptions may be made for wide moat companies which consistently generate large amounts of free cash flow. Operating Cash Flow ratio (OCF)
= Cash flow from operations/Current liabilities This is a relative figure and so should be used for comparison. Interest Coverage ratio
= Earnings before interest and taxes/Interest expenses < 1.5 suggests concern shold be given to a company's ability to meet its interest expenses 
Quick ratio
= (Current assets  Inventory)/Current liabilities This ratio is a stricter measure of liquidity than the current ratio as it focuses solely on the most liquid assets, namely cash and those assets which can be quickly converted into cash. For this reason it omits inventory since this can sit idle if a company's sales stagnate. Cash Flow to Debt ratio
= Operating cash flow/Total debt Cash Interest Coverage ratio
= Cash flow from operations + interest paid + taxes paid/Interest paid < 1 signals immediate risk of default 
Cash current debt coverage ratio
= Operating cashflow  Cash dividends/Current Debt This ratio considers management's dividend distribution policy and it's consequent effect on cash balance available for current debt obligations. 
Funds flow coverage (FFC) ratio
EBITDA/(Interest + Taxadjusted debt repayment + Taxadjusted preferred dividends) This ratio assesses the coverage of unavoidable expenditures. In order to adjust for taxes one must divide by the complement of the tax rate. 
Sir John Templeton Leverage Ratios*
*Total Debt/(TTM) EBITDA (Templeton considered a ratio of < 3 to be a conservative benchmark).

*EBITDA Coverage ratio = Earnings + Interest expense + Taxes + Depreciation/Interest expense. (Templeton considered > 6 to be a conservative bench mark).

*Free cash flowtoShortterm debt ratio
= FCF/Shortterm debt If the figure is < 1 the company doesn't generate enough FCF to cover it's shortterm debt obligations. 
Liquidity ratio
= cash & equivalents / Shortterm debt This ratio expresses a company's ability to repay it's shortterm creditors out of it's total cash. If the value is > 1.00 it means the shortterm debt obligations are covered. 
Miscellaneous Ratios
Texas ratio
= (Assets Past Due 90 Days or More + Nonaccrual Assets + OREO) / (Common Equity  Preferred Stock  Intangible Assets + Loan Loss Allowance) This ratio was developed by Gerald Cassidy at RBC Capital Markets to measure the credit problems of banks. Cassidy noted that banks tend to fail when a ratio of 1 : 1 (100%) is reached. Nonperforming Asset (NPA) ratio
= Net Nonperforming assets/Loans given A higher ratio reflects a greater proportion of poor quality loans. 
Combined ratio
= (Incurred Losses + Expenses)/Earned Premiums A combined ratio < 100% represents an underwriting profit for an insurance company. Conversely a ratio > 100% represents an underwriting loss. Total Free Cash (TFC) ratio
= (Net Income + Accrued and capitalized interest + Depreciation and amortization + Operating lease and rental expense  Declared dividends  Capital expenditures)/(Accrued and capitalized interest expense + Operating lease and rental expense + Current portion of longterm debt + Current portion of capitalized lease obligations) This ratio was developed by the First Interstate Bank of Nevada. It's usefulness lies in the fact that it takes into account offbalance sheet financing in the form of operating leases and rental payments. 
Cash Flow Adequacy (CFA) ratio
= (EBITDA  Taxes paid  Interest paid  Capital expenditures)/(Average annual debt maturities scheduled over next 5 yrs) The CFA ratio determines a company's credit quality. It mitigates the cyclical distortions present in the standard CAPEX ratio and accounts for the effects of balloon payments. Companies with strong FCF relative to their upcoming debt obligations are deemed a safer credit risk than those which must seek capital externally, ergo the higher the CFA ratio the higher the credit quality of the company. 
Sloan ratio
= Net income  operating cash flow  Cash flow from investments/Total assets

EV/DACF ratio
= Enterprise value/ debt adjusted cash flow This ratio is superior to the standard P/CF ratio which can be distorted by debt and leverage. 
EV/BOE/D ratio
= Enterprise value/Barrels of oil equivalent per day(BOE/D) This is a key ratio used by Oil & Gas analysts and should be used on a relative basis. If the multiple is high compared to a company's peers it is trading at a premium, if it is lower it is trading at a discount. 
EV/P2 ratio
= Enterprise value/Proven + probable reserves This ratio allows Oil & Gas analysts to calculate how well a company's resources can support its operations. Analysts tend to refer to proven reserves as P90 (those having a 90% probability of being produced), probable reserves as P50 (those having a 50% probability of being produced). A lesser used variation of this formula known at the EV/P3 ratio also takes into account possible reserves, known as P10 (those with a 10% probability of being produced) 
Altman ZScore
= ([Working Capital / Total Assets] x 1.2) + ([Retained Earnings / Total Assets] x 1.4) + ([Operating Earnings / Total Assets] x 3.3) + ([Market Capitalization / Total Liabilities] x 0.6) + ([Sales / Total Assets] x 1.0) The Zscore is a statistical tool used to measure the likelihood that a company will go bankrupt. It is tailored toward manufacturing companies and functions as a gauge of credit strength. In general, the lower the score the higher the chance of bankruptcy. Z > 2.9 is in the safe zone, Z > 1.23 < 2.9 is in the grey zone Z < 1.23 is in the distress zone The Zscore can be modified for nonmanufacturing firms by removing the last component, namely (sales / total assets), as Altman wanted to remove the intensive asset turnover found in manufacturing firms. 