June 19, 2016

Key Financial Terms and Ratios that are Useful for Evaluating Stocks - Part 2

Read Part 1 here:
Key Financial Terms and Ratios that are Useful for Evaluating Stocks - Part 1

Here are some more financial terms and ratios that can be further analyzed to determine the long-term prospects of the stock:
  • ROS (Return On Sales) - is the earnings of the company as against the sales/revenues done by the company.
  • ATO (Asset Turn Over) - is the sales/revenue generated by the company as against the assets it has. Higher ATO means an efficient business model where assets are effectively utilized to generate higher sales/revenues.
  • OCF (Operating Cash Flow) - is the cash generated from the operations. It is important that the company's cash comes from operations and not "other sources".
  • CAPEX (Capital Expenditure) - is the cash invested to create new assets or replace old and obsolete assets. Assets are utilized by the company to conduct its business operations that generate revenues and profits.
  • FCF (Free Cash Flow) - is the hard cash that is generated by the company. This is derived from the Cash Flow Statement and is calculated as OCF minus CAPEX.
  • TDB (Total Debt Burden) - is a measure of the total debt on the company and includes both interest and principal component. Too much of debt is a risky proposition for any company. In bad times, too much debt can result in bankruptcy and the company eventually going out of business. 
  • TIB (Total Interest Burden) - is a measure of the total interest on debt on the company. Not being in a position to pay even the interest on debt is a serious issue for any company and indicates that the company is on its way to bankruptcy.
  • DBR (Debt Burden Ratio) - is a measure of whether the company is earning enough to repay its loans. It is calculated as the ratio of  TDB to the FCF. This number indicates whether enough hard cash is being generated for repaying the interest and principal component that are due for payment.
  • DSCR (Debt Service Coverage Ratio) - is a measure of whether the company is generating enough profit to be in a position to take care of its debt liabilities. Debt here means both interest and principal component. It is calculated as the ratio of TDB and NPM.
  • ISCR (Interest Service Coverage Ratio) - is a measure of whether the company is generating enough profit to be in a position to take care of its interest on debt liabilities. It is calculated as the ratio of TIB and NPM.

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