After learning about key financial ratio from the previous article (Key Financial Ratios To Evaluate Companies
), this article will show an example based on the financial statements of CG Oil Company in 2014.
Figure 1 and Figure 2 are a company balance sheet and profit and loss account, respectively.
Figure 1 – CG Oil Company Balance Sheet
Figure 2 – CG Oil Company Profit and Loss
Company has a total of 10,000 million shares.
Company plans to pay a dividend of 0.4 $/share.
These are calculations of the important financial ratios.
Current Ratio = Current Assets ÷ Current Liabilities
Current Ratio = 32,270 ÷ 36,843
Current Ratio = 0.876
This is not a good sign for this company since the current ratio is 0.875.
Quick Ratio = (Current Assets – Stock in Inventory) ÷ Current Liabilities
Quick Ratio = (32,270 – 8,745) ÷ 36,843
Quick Ratio = 0.639
Debt to Equity Ratio = Total Financial Debt ÷ Equity
Debt to Equity Ratio = (2,650 + 3,458) ÷ 29,892
Debt to Equity Ratio = 20.43%
Debt Ratio = Total Financial Debt ÷ Total Asset
Debt Ratio = (2,650 + 3,458) ÷ 79,653
Debt Ratio = 7.67 %
Profit Margin = Profit before interest and taxation (PBIT) ÷ Turnover (Sales)
Profit Margin = 18,627 ÷ 87,521
Profit Margin = 21.28%
You may need to compare it to other companies in the same business. This is a relative value. More profit margin = good.
Return on Asset (ROA) = Profit before interest and taxation (PBIT) ÷ Total Assets
Return on Asset (ROA) = 18,627 ÷ 79,653
Return on Asset (ROA) = 23.4%
Earnings Per Share (EPS) = Profit after Tax ÷ Total shares
Earnings Per Share (EPS) = 10,932÷ 10,000
Earnings Per Share (EPS) = 1.0932 $/share
Dividend Cover = Earnings Per Share (EPS) ÷ Annual Dividend Per Share
Dividend Cover = 1.0932 ÷ 0.4
Dividend Cover = 2.733
Reference Book
Thomas Sowell (2007) Basic economics: A Common Sense Guide to the Economy, New York, New York, USA: Basic Books.
