Understanding Financial Ratios
In understanding key financial ratios, one should first of all know what they are. These financial ratios are all relative to the company’s income and assets. There is a general consensus among analysts that a good measure of a companies’ health is its net worth – or how much it is worth at present, minus what it owns, minus what it owes. A good measure of health would be a ratio of current assets to current liabilities – that is, a positive ratio.
One important ratio to understand is the equity-to-debt ratio. This ratio measures the total value of the stock compared to its total liabilities. It is expressed as a ratio, so it would be written as “a”. The lower the number, the healthier the company’s finances.
Another important ratio to understand is the liquidity ratio, which compares the current liquid assets of the business to its total outstanding credit. The higher the value of the business, the higher is the ratio. To determine liquidity, one would write, “the current assets/liabilities less the current liabilities”. Another way to calculate this is to deduct the current assets from the current liabilities and divide by the total current assets. The calculation is then “a – b”.
Another key financial ratios used by investors to assess a pharmaceutical companies solvency is the free cash flow. This is often called the EBIT or the Excess Cash Flow. This ratio is actually a two-way calculation. First, it measures the net income or cash inflows. Second, it measures the net outflows, or the net disbursements, for the profit or loss generation cycle.
These two ratios – EBIT and NPE (Net Presentation) – are very important in determining an companies solvency. The two ratios are not equal, but they are usually within range of each other. Investors use these two figures to analyze the profitability of a pharmaceutical company. If one of the ratios is significantly different from the other, then it may be a sign that the business is experiencing some difficulty generating cash.
As one can see, understanding key financial ratios for pharmaceutical companies can be quite complex. There are many other financial ratios available to investors when they are evaluating a company’s equity. However, these two should still be part of any comprehensive analysis of the business’s balance sheet.
Some of the financial ratios that pharmaceutical companies should consider adding are free cash flow and the operating margin. Free cash flow is simply the difference between the total revenue and the cost of goods sold. By looking at the cost of goods sold, it is possible to determine the operating margin. This includes both tangible assets and fixed assets. In addition, the quick ratio measures the time it takes for a firm to make a profit.
There are a number of other ratios that investors may want to consider as well. However, these two are two of the most important. Other factors that are important to pharmaceutical companies include the debt to equity ratio, gross profit margin, net income per share (NPS), and the free cash flow. All of these ratios are important, but the key financial ratios, including the free cash flow, are perhaps the most important. As pharmaceutical companies strive to maintain healthy balance sheets, understanding their key financial ratios will be crucial to their success.
The turnover ratio measures how often a company is sold. The higher the turnover ratio, the healthier the financial health of the company. Because pharmaceutical companies have such a high number of patents on their products, the turnover rate is often the measure of how often the company creates new products. As turnover is one of the key ratios used to gauge the health of the company, it should be understood.
The business banker ratios examine how liquid the company is. Because patents often prevent new innovations from being sold, it may not always be easy to find new products to sell to customers. When liquidity is low, the business banker ratios will show a low number. In addition, the business banker ratios will show the amount of new loans the business has taken on. When a business bank exists to lend money to a company, this loan will be reflected in the ratio.
Lastly, the debt-to-equity ratio measures the net worth of a company. This debt-to-equity ratio is calculated by dividing the market value of a company’s stock by its total assets. When the ratio is high, it indicates that the stock is expensive, and when it is low, it indicates that the stock is cheap. Companies with high debt-to-equity ratios also tend to have lower profits. To keep your financial health, it is important to understand these ratios and keep them in mind.