- A - Return On Sales - ROS
Recommended level: as high as possible
Interpretation: The ratio that describes the capacity for generating the profit through the sales. In other words - it shows the share of net profit in the total value of sales, which is simply the profit margin from the specified sales volume. The lower the ratio is, the higher the level of sales has to be in order to reach the assumed level of profit. According to this, the higher value of the ratio is more favourable, because it proves the higher profitability of sales. Due to this, the company's ratio should be compared with the other firms from the analysed branch.
- B - Return On Equity - ROE
Recommended level: as high as possible
Interpretation: This ratio informs us of the profitability of the capital, involved in company - due to this, it is very important to current and potential shareholders. It reflects the rate of profit, made on one unit of the invested capital. The higher efficiency of the equity capital is connected with the possibility for gaining the higher financial surplus, followed by higher dividends for the shareholders as well as better development prospects for the company.
- C - Return On Assets - ROA
Recommended level: as high as possible
Interpretation: The ratio reflects the profitability of the assets and informs about the value of net profit, generated by the one unit of the company's assets. It shows the effectiveness in managing the company's assets - the higher the ratio is, the better prospects for the future are. The Western banks that grant credits require this ratio at the level 2% to 6%. In addition to this, smaller firms should present the higher levels of this ratio than the bigger ones.
- D - Return on Economic Activity - ROEA
Recommended level: as high as possible
Interpretation: This particular ratio embraces a narrower range of company’s economic activity and excludes few factors that are not strictly dependent on the company and its actions. It presents clearly the outcome of the three basic types of economic activity (main, investment and financial activity) in form of the profit on economic activity that does not include several values, such as the outcome of the exceptional events, income tax or other compulsory burdens imposed on company. In other words, it reflects the effectiveness of the company and funds engaged in it with reference to the implemented set of business.
|
- E - Current Ratio - CR
Recommended level: 1,5 - 2
Interpretation: This ratio reflects the basic dependence between the liquid assets and the value of short-term liabilities. The level of current assets should assure creditors that there are sufficient supplies for the production processes - even if all of them would ask for the instant settlement of the debts. Too high ratio (>3) indicates an ineffective use of the current assets in the company. Too low ratio (<1) means: we have problems with solvency.
- F - Quick Ratio - QR
Recommended level: >1
Interpretation: It shows that the most liquid components of the current assets should slightly exceed the level of the short-term liabilities. Such structure of the balance sheet has influence on company's flexibility in the matters of payments. Higher levels of this ratio may mean that the company inefficiently exploits its current assets. In contradiction, when the ratio is below 1, there may appear a threat to the company's capacity for settling its debts on time.
- G - Debt Ratio -DR
Recommended level: 0,57 – 0,67
Interpretation: This particular ratio reflects the share of liabilities in financing the company's activity. The higher levels it reaches, the bigger debts of the company and the higher financial risks are. In other words - a significant increase in its level may result in losing capacity for settling the debts. On the other hand, when it is too low, the company becomes a self-financing institution, which means that it does not take the advantage of its development opportunities. The highest levels of this ratio characteristic for the banks and leasing companies.
- H - Solvency Ratio - SR
Recommended level: 0,65 - 0,75
Interpretation: The solvency ratio sets the share of the equity capital in total liabilities - the higher the solvency ratio is, the bigger the share of equity capital in the company's total liabilities is. Due to this, paying off the outside capital with our own assets becomes much easier. When the company is expanding or reducing its activity, the solvency ratio can fall or rise, depending on the character of the funds' sources. The financial lever shows the structure of financing the company's assets, which is an equivalent to the share of both elements - the equity capital as well as the outside capital. The high solvency ratio (the significant share of equity capital in financing the company's assets) is followed by the low financial lever for the specified company, small risk and more promising opportunities to take new credits (it is equal to the better credit standing). The low solvency ratio (a small share of equity capital in financing the company's assets) is an equivalent to the high level of the financial lever, major risks as well as worse opportunities to take new credits (which can be compared to worse credit standing). With the help of this ratio, the range of the company's debt is calculated. It depends on the adopted financial strategy:
The moderate strategy – relation of the equity capital to the outside capital is a simple 1 : 1.
The aggressive strategy – the level of the company's debt is relatively high in this strategy. It express the firm's interest in involving the outside funds in the possibly widest range. The ceiling on debt that would be acceptable for creditors is fixed by the relation between the equity capital and the total assets - here it is 1:2, which means that up to 70% of the assets' value can be covered by liabilities.
The conservative strategy – the level of debt is relatively low; relation: equity capital to total assets = 3 : 1; such relation is perceived as a floor of debt.
In practice, the debt ranges for the particular strategies are diverse, depending on the branch, level of risk, capital-intensity or the average profitability.
|
- I - Receivables Turnover - RT
Recommended level: approximately 60 days (for the period of 360 or 365 days)
Interpretation: It shows the number of days following the sale without an effected payment. It tells how widely the company credits its customers or, in other words, how long the money is frozen in the receivables. In numerous companies, uneffected receivables are overdue for about 2 months. When the overdue period exceeds the level of two months, it may cause a hold-up in payments.
- J - Borrowings Turnover - BT
Recommended level: approximately 60 days (for the period of 360 or 365 days)
Interpretation: It sets the average period of settling the debts in the company. The higher the ratio is, the less current assets are needed. When compared to the Receivables Turnover, it shows the capacity of the company for settling its own debts.
- K - Inventory Turnover - IT
Recommended level: as low as possible
Interpretation: On the basis of this ratio we can estimate the number of the days of the continuous sale with the current volume of the stock. Due to its fixed character it can be treated as some kind of capital investment. The level of index tells us how long cash will be frozen in inventory.
|
- L - Short-Term Liabilities to Current Assets Ratio - LAR
Recommended level: ≤66%
Interpretation: If the short-term liabilities do not exceed the level of current assets, a „silver rule” is retained. It is assumed that the solid equity should finance at least 1/3 (≥33%) of the current assets. The rest should be covered by the short-term sources of financing due to the fact that those assets are relatively independent from being frozen in the business processes. Obeying the mentioned rules conduces maintaining the financial equilibrium in the company – such equilibrium decides about the current and future existence of the business.
- M - Solid Equity to Solid Assets Ratio - SESAR
Recommended level: ≥100%
Interpretation: The above presented ratio express the share of the solid equity in financing the solid assets of the company. If the level of solid equity is equal or higher than the level of solid assets, then the „silver balance rule” is obeyed and retained. The most important thing in here is the share of the equity capital in the whole solid equity. The higher it is, the more independently company can operate. It is commonly accepted that the 2/3 of the solid assets should be financed from the equity capital sources. However, this rule does not apply to all of the branches – due to this, the findings should be compared with the average results In the specified branch. If the company wants to pursue a proper financial policy, its solid assets should cover the whole solid assets as well as some part of the current assets.
|