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Title: Ratios Made Simple: A beginner's guide to the key financial ratios
Author: Leach Robert

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### Document preview

Cover
Introduction
What is a ratio?
Calculating ratios from company accounts
Understanding a ratio
How investors should use ratios
1. Profitability Ratios
1.1: Earnings Per Share (EPS)
Basic information and calculating the ratio
Diluted EPS
Understanding EPS
How to use EPS as an investor
1.2: Price-to-Earnings Ratio (P/E)
Basic information and calculating the ratio
Understanding P/E Ratio
How to use P/E as an investor
Variations on P/E ratio
1.3: Enterprise Value/Earnings Before Interest, Taxes, Depreciation and
Amortisation Ratio (EV/EBITDA)
Basic information and calculating the ratio
Understanding EV/EBITDA
How to use EV/EBITDA as an investor
1.4: Price-to-Sales Ratio (PSR)
Understanding PSR
How to use PSR as an investor
2. Investment Ratios
2.1: Dividend Yield
Understanding dividend yield
How to use dividend yield as an investor
Variations on dividend yield
2.2: Total Return
Understanding total return
How to use total return as an investor
Variations on total return
2.3 Return On Capital Employed (ROCE)

Understanding ROCE
How to use ROCE as an investor
Variations on ROCE
2.4: Return On Equity (ROE)
Understanding return on equity
How to use ROE as an investor
Variations on ROE
2.5: Premium to Asset Value (PAV)
Understanding PAV
How to use PAV as an investor
2.6: Internal Rate of Return (IRR)
Understanding the internal rate of return
Using the internal rate of return as an investor
2.7: Return On Assets (ROA)
Understanding return on assets
How to use ROA as an investor
Variations on ROA
2.8: Dividend Payout Ratio
Understanding dividend payout ratio
How to use the dividend payout ratio as an investor
Variations on the dividend payout ratio
3. Dividend Cover
3.1: Dividend Cover
Understanding dividend cover
How to use dividend cover as an investor
4. Margins
4.1: Gross Margin and Net Margin
Understanding profit margins
How to use profit margins as an investor
Variations on gross and net margins
5. Gearing
5.1: Gearing Ratio
Understanding gearing
How to use gearing as an investor
5.2: Interest Cover
Understanding interest cover
Using interest cover as an investor

6. Solvency Ratios
6.1: Acid Test
Understanding the acid test
How to use the acid test as an investor
6.2: Current Ratio
Understanding current ratio
How to use current ratio as an investor
6.3: Cash Burn
Understanding cash burn
How to use cash burn as an investor
6.4: Defensive Interval
Understanding defensive interval
How to use defensive interval as an investor
6.5: Fixed Charges Cover
Understanding fixed charges cover
How to use fixed charges cover as an investor
7. Efficiency Ratios
7.1: Stock Turn
Understanding stock turn
How to use stock turn as an investor
Variation on stock turn
7.2: Price-to-Book Value (PBV)
Understanding price-to-book value
How to use price-to-book value as an investor
7.4: Item Comparison
Understanding item comparison
How to use item comparison as an investor
Variations on item comparison
8. Policy Ratios
8.1: Creditor Period
Understanding the creditor period
How to use creditor period as an investor
8.2: Debtor Period
Understanding the debtor period
How to use the debtor period as an investor
8.3: Fixed Asset Spending Ratio
Understanding the fixed asset spending ratio

How to use the fixed asset spending ratio as an investor
9. Volatility
9.1: Volatility Ratio
Understanding volatility
How to use volatility as an investor
9.2: Standard Deviation
Understanding standard deviation
How to use standard deviation as an investor
Variation on standard deviation
Appendix

HARRIM AN HOUSE LTD
Petersfield
Hampshire
GU32 2EW
GREAT BRITAIN
Tel: +44 (0)1730 233870
Fax: +44 (0)1730 233880
Email: enquiries@harriman-house.com
Website: www.harriman-house.com
First published in Great Britain in 2010
The right of Robert Leach to be identified as Author has been asserted in accordance with the Copyright, Design and Patents Act
1988.
ISBN: 978-0-85719-082-6
British Library Cataloguing in Publication Data
A CIP catalogue record for this book can be obtained from the British Library.
All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by
any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the Publisher.
This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than
that in which it is published without the prior written consent of the Publisher.
Designated trademarks and brands are the property of their respective owners.
No responsibility for loss occasioned to any person or corporate body
acting or refraining to act as a result of reading material in this book
can be accepted by the Publisher or by the Author.

Robert Leach FCCA ACA is a chartered accountant, lecturer and author of
more than 40 books, mainly on financial topics. His books include The
Investor’s Guide to Understanding Accounts. For two years he was a judge of
the Stock Exchange Awards for best published accounts. He has written
encyclopaedias on tax and payroll, and also writes for newsletters, magazines,
newspapers and anyone else who will pay him.