Financial ratio analysis
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- čas přidán 27. 07. 2024
- Financial ratios explained! How does financial ratio analysis work? Let’s discuss ten of the most popular financial ratios that can help you find the story behind the numbers.
What do you need to get started on a financial ratio analysis? You need an income statement, the overview of how much profit a company made during a year. You also need a balance sheet, an overview of what a company owns and what a company owes at a specific point in time. We will start off with financial ratios that only focus on the income statement, then look at #financialratios that only focus on the balance sheet, and end with powerful financial ratios that combine information from the income statement and the balance sheet. Performing a financial ratio analysis has a scientific element to it (finding data and putting it into formulas), as well as an artistic element (assigning meaning to the outcome of the calculations, and seeing the big picture).
⏱️TIMESTAMPS⏱️
00:00 Introduction to financial ratio analysis
00:12 Income statement and balance sheet
00:45 Financial ratio analysis: an art and a science
01:02 Financial ratios on the income statement
01:39 Gross Profit % - Operating Margin % - Return On Sales %
02:29 Analyzing income statement financial ratios
03:35 Financial ratios on the balance sheet
04:01 Current ratio
04:40 Working capital
05:16 Debt-to-equity ratio
06:30 Financial ratios combining income statement and balance sheet
06:46 Return On Equity
07:26 Asset turnover ratio
08:00 Receivables turnover ratio
08:18 Days Sales Outstanding
08:38 Inventory turnover ratio
08:58 Financial ratio analysis summary
In this video on financial ratio analysis, we cover ten financial ratios:
On the income statement: gross profit %, operating margin %, return on sales %
On the balance sheet: current ratio, debt-to-equity, equity as % of total
When linking the P&L and the balance sheet: return on equity, asset turnover, receivables turnover, inventory turnover
Philip de Vroe (The Finance Storyteller) aims to make strategy, #finance and leadership enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: CZcams videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!
Lots of exciting and helpful new videos coming up! Be sure to click the like button, subscribe and turn on notifications to ensure you don't miss anything. Dive deeper into financial ratios by watching my videos on the Current Ratio czcams.com/video/dkiSWO2OYho/video.html and DuPont ROE analysis czcams.com/video/bhbDDSohJ84/video.html Or zoom out to the bigger picture of financial analysis: czcams.com/video/jG-oXx54qxE/video.html
I just watched a 4 hour video and learnt what this 10 minute video taught me
Hope you come back to visit my Finance Storyteller channel many more times, Sanskriti! More than 200 videos available on a wide range of finance, accounting and investing topics.
,😁😁samgha Aya ya nii
I have an interview tomorrow and I am roughly brushing through finance concepts and I must say that your videos have saved me a lot of time! You have explained everything with a lot of crispness and clarity, no shenanigans. Exactly what's needed for finance studies. Keep it up! Great work!
Thank you so much, Javeria! I love your description of my channel/videos. 😎 Wishing you lots of success in your interview!
I have an interview today at 2 am .
So eye opening.... I love the easiness of explanation, always get the A-ha feeling. Something you can really miss in schools
Thank you very much! :-)
Absolutely Ah-mazing! As somebody from a non-financial background, I think I've finally gotten these ratios into my head..permanently! Thanks for making this super helpful video
Fantastic! So happy to hear that. In the financial ratio analysis playlist, I go one or two steps deeper into most of these ratios, with examples: czcams.com/video/bhbDDSohJ84/video.html
Thank you for the easiest explanations possible. The best part of your videos that I like is trying to explain art side of analysing annual report which is very rare. Thank you very much.
Thanks for the feedback! That feels great. :-)
That was THE BEST explanation of financial ratios ever!!!!!!! I look forward to more!
Wow, thanks for the compliment, Halima! I have compiled all the videos I made around specific financial ratios in one playlist, hope you find some videos that can help you.... czcams.com/video/bhbDDSohJ84/video.html
Whoever you are; love you for this excellent video & brilliant explanation! Thank you so much. You've made my life sooooooo much easier.
Hello Alex! It's Philip here. Thank you very much for the kind words. Happy to help!!! :-)
Thanks Philip for all your efforts. Really appreciate how you simplify things. These videos are really helpful.
Wonderful to hear that, Sujoy! Happy to help. :-) Did you watch the recent follow-up video on financial analysis as well: czcams.com/video/jG-oXx54qxE/video.html
Well Philip, i am brushing up few of my finance concepts for my interview purpose hence picking and choosing as per my requirements. However I have made a point now when I go for my morning walk I will plug in my earphones and listen to all your videos. You have explained them in such simplified manner that i don't even need to see your videos to follow you.
Wow, happy to hear that. It's nice to join you on your walk! ;-)
Amazing content! I am doing my MBA and studying financial ratios for the first time. A lot to wrap your head around initially, but this video made it extremely easy to understand both the calculations and the meaning behind it. Thank you!
Wonderful to hear that! Welcome to the channel. Please share with your fellow students. 🙂
I think the DuPont method is a great start into any ratio analysis. Here's the link to a discussion of the concept, as well as some real world examples: czcams.com/video/bhbDDSohJ84/video.html
For your MBA, my case studies of the financial statements of well-known companies might also be helpful: czcams.com/video/PI9X5Ybek_E/video.html
This is helpful, thank you for making this!
You're welcome! :-)
I love all your videos, it helped a lot understanding finance & financial statements!! I wish there was like a quiz or homework with each video to practice or like a full online course with practice questions:)
Thank you for the compliment and the suggestion, Mohammed! I posted a review question about dividend versus growth stocks on the "Community" tab of my channel today. If viewers enjoy and like these, I will post more of them (both in the public section of the Community tab, and the members-only one).
Thank you very much! Appreciate the content and its conciseness.
Thanks for the feedback! Happy to hear you enjoyed it. :-) I have some related videos that go deeper into several of these ratios, for example the current ratio: czcams.com/video/dkiSWO2OYho/video.html
Well, you Mr have brought the level of teaching to another level, thank you very much.
Great to hear that! Thank you very much!
It's simple and engaging. I practically opened an excel to follow you step by step. Thank you so much.
That is wonderful to hear, Francisca! Thank you for watching and commenting!
Thank you! This has to be the clearest example of the financial ratios and looking at a Balance sheet and Income statement.
Thank you for the very kind comment! More good stuff on ratios and how they work in the real world in this playlist: czcams.com/video/bhbDDSohJ84/video.html
Hi, I want to say thank you for the videos!I'm an English major and I have taken some electives in Economics. I have an interview coming soon. Your videos help me refresh what I have been reading on my own. Wish there can be some excel practices or case analysis!
Nice to hear that! Thank you for watching and commenting. Happy to help. After watching some of my videos like "How to read an annual report", you should be able to take an annual report of a company you are interested in and do an analysis: czcams.com/video/Kw-1nopchnA/video.html
One of the best or I should say the best video ever on ratios. Your video is a gem...
Thank you for the kind words! Please share with friends and colleagues, and have a look at more detail and examples of some of these ratios: czcams.com/video/bhbDDSohJ84/video.html&pp=gAQBiAQB
you are a goattt and just saaved me 2hours of lectures
Thank you!!! Happy to help. Please share with fellow students.
You are the man. Your videos are a lifesaver!
Wow, thank you very much for the compliment, Max! Made my day!
Thank you for your videos! The storytelling spin makes such a difference in my learning.
Glad to hear it! The calculations are a means to an end: understanding what is going on in a company. I think you will enjoy my video on real world ROA (Return On Assets) analysis as well: czcams.com/video/2j8bfR8KqJ0/video.html
The way you explain reminded me a lot of one of my professors! Thanks a lot sir, this was very useful !
Wonderful to hear that! Thank you for watching and commenting. I have more detailed "individual" explanations of many of these ratios in this playlist: czcams.com/video/bhbDDSohJ84/video.html
Thank you so much for creating and sharing this video! Studying this video has helped strengthen my financial acumen.
Glad it was helpful, Andy! Please subscribe, and share the link to the channel with friends & colleagues. :-)
This was very helpful, thank-you
You're welcome, Jessica! Happy to help. :-)
You did a good job, great job and excellent job!
Hahaha! Thank you very much! 😎
Amazing channel.... I love it and the way you have taught.. keep it up :)
Thank you very much 😀
Great , a very good analysis.
Thanks you.
Glad you liked it! Please subscribe to the channel.
Wonderful! I have an interview in next hours and this video helps me alot. Whatever the result will be, i would like to send my big thanks to you, The Finance Storyteller!
Wishing you lots of success!!! It's great that you are going "beyond the textbook" to learn additional concepts and skills. That's a big quality to look for when hiring a candidate.
so helpful, thank you so much
So happy to hear that, Vinh! Thank you for watching and commenting.
Absolutely amazing Thanyou
Thank you, Riley! That is nice to hear!
amazing video, thanks
You're welcome! Thank you for watching.
I have business finances exam today and ı watched that video, it helps me to understand. Thank you for this video.
Wishing you lots of success!!! Hope it goes very well.
This is better than any finance course in university. Thank you Sir!
Wow, thanks! That is a very big compliment, and I am very happy to hear it. Please spread the word to friends and colleagues.
Wonderful man... great explanasion
Thank you very much, Navjot! :-)
Clearly explained. I learn a lot from this important explanation.
Great to hear, Oli! Thank you for watching and commenting. I have some more videos on my channel that cover specific ratios in more depth, for example the current ratio czcams.com/video/dkiSWO2OYho/video.html DSO czcams.com/video/duN0BAY9Q8s/video.html or Return On Equity czcams.com/video/6fA5N4giHrM/video.html
hi, thank you for your help.... can i do any ratios from the Statement of comprehensive income, SOFP and statement of changes in equity?
Thanks
Ben
Hello Ben! No ratios that I know of for the statement of comprehensive income, and the statement of changes in equity. With the acronym SOFP, I assume the Statement Of Financial Position, or balance sheet. I cover balance sheet ratios in the middle section of the video, with ratios like the Current Ratio, Debt-to-Equity, and Equity as % of balance sheet total.
thanks for four help
Very good ... This is exact I am looking for ... So direct and summery for the ratios and for what we use it to declare or measure ... Can we say it also shows the pad financial structure of the companies ??
Thanks for the feedback, Mohamed! Nice to hear that. Not sure about your question regarding the "pad financial structure", what does the word "pad" mean in this context?
Thank you sir.
You're welcome, Armel!
Thank you for the great explanation
Glad it was helpful! Related videos on DuPont analysis (ROS, asset turnover, ROE), DSO, current ratio, ROIC, and many more, in this playlist: czcams.com/video/bhbDDSohJ84/video.html&pp=gAQBiAQB
Nice it was so clear information, for understanding keep it up, also do other videos
Thank you very much, Sathish! I have 150 videos so far (some of them about specific financial ratios such as current ratio and return on equity), and plan to make many more.
if you were forced to look at only one before taking a decision to invest in a company; what would it be: a balance sheet or a p/l statement?
Nobody could ever force me to look at only one before taking a decision to invest in a company. I tend to start with the cash flow statement, then income statement, then balance sheet. See also my video on how to read an annual report: czcams.com/video/Kw-1nopchnA/video.html
Thank you. You got a new sub!
Awesome, thank you Ron! Welcome.
This was great and helpful and some ratios were explained but perhaps it is also important to share why some other ratios are important and their function in interpreting the analysis
Thank you! There is a limit to how long I wanted to make a video like this, which is an introduction to financial ratios. You can find many more ratios and a more detailed discussion in this playlist: czcams.com/video/bhbDDSohJ84/video.html
thank you for your videos
My pleasure! Thank you for watching and commenting.
Very well done! Thanks for posting.why dont you include cash in the working capital category of line items?
Thank you for watching and commenting, Andy! Working capital tends to get defined in textbooks as the current assets on a company’s balance sheet minus its current liabilities. Current assets include items such as cash, marketable securities, accounts receivable, inventory, and prepaid expenses. Current liabilities include items such as short-term debt, accounts payable, accrued liabilities, and deferred revenue. There is a much more practical definition, used in everyday business life, that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable. See my videos on working capital management: czcams.com/video/c5iigcEppZw/video.html
Thank you
You're welcome, Modou!
thank you for your video, it is a great educational video bcs it is easy to understand. and i want to ask a question, what does art mean in financial ratio?
The "art" part is about being able to recognize when the outcome of the calculation for a financial ratio does or does not make sense, when it does or does not provide you real insight in how the company operates, which ratios to look and which ones to ignore, how to interpret the outcome of the calculation, etc. See my discussion of the current ratio: a high or a low score on current ratio could mean different things: czcams.com/video/dkiSWO2OYho/video.html
Just subscribed to your channel. Thanks for this video.
Happy to help, Terry! Welcome to the channel. Hope you find a lot of useful videos here.
@@TheFinanceStoryteller thank you
Beautiful. I have been trying to see how to read if a company is heading for bankruptcy. Red flags in the balance sheet.
Thank you! I am working on a video covering solvency and liquidity, as I am fascinated by that too!
@@TheFinanceStoryteller Thanks :-), after Hertz filed for bankruptcy,, I am looking at one of my holdings .. I am thinking of getting out before it is too late :-)
Helpful video. Check your definition of inventory turns. Should be GM$/AVG INV $
Thank you, Walton. There are multiple definitions of inventory turns, see my discussion in the video on this topic: czcams.com/video/uhJV5fbVNYE/video.html
I like the video.....very educative.
Thank you very much!!! :-)
Very helpful to clarify ratios I learnt form class but isn’t inventory turnover calculated as cost of goods sold/inventory?
Thank you! Happy to help. There are two ways of calculating inventory turnover, I find sales divided by inventory the more useful one, even though most classes blindly use COGS/inventory. See my discussion in the inventory turnover video: czcams.com/video/uhJV5fbVNYE/video.html
This was awesome
Thank you!!!!! :-)
Thank you so much for this video but doesnt working capital mean current assets - current liabilities ? why was cash excluded at 4.59 then? Thanks!
Working capital tends to get defined in textbooks as the current assets on a company’s balance sheet minus its current liabilities. Current assets include items such as cash, marketable securities, accounts receivable, inventory, and prepaid expenses. Current liabilities include items such as short-term debt, accounts payable, accrued liabilities, and deferred revenue.
However, there is a much more practical definition, used in everyday business life, that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable. This latter (real-world) definition is what I am using in this and other videos. See also my video on working capital management: czcams.com/video/c5iigcEppZw/video.html
Thank you very much sir
Most welcome!
This video offers a lot of good information on how to calculate things, but I still don't know which company is doing the best, so I don't know which figures I should be focusing on to ensure I'm not in serious risk.
That is a very valid point, Fred! In my view, there is no "one size fits all" set of financial metrics that leads you to conclude which company is doing best. It very much depends on the stage of development the company is in: czcams.com/video/UGd2llFBiMA/video.html Also, the related financial analysis explained video gives you some ideas of how to dive deeper into the drivers behind the financial ratios czcams.com/video/jG-oXx54qxE/video.html
Thank you for taking the time to reply to my comment. It's much appreciated. BTW, your videos are very informative, and also appreciated.
@@freda2758 Great to hear that, Fred! Please subscribe, and spread the word!
5:00 when calculating working capital why did you not add CASH as current assets??
kindly reply...i have exam tomorrow
Hello Hassan! There are two definitions of working capital in use: the academic/textbook definition that includes cash, and the "practitioner" definition that most companies/myself use that excludes cash.
Thanks Hassan for asking this question and thanks The Finance Story teller for replying! I was so confused with this :).
Great video. Thanks for making it. Keeping It Simple Stupid = KISS it baby! :)
Happy to help! If you want to dive deeper into some of these concepts, have a look at for example my DuPont analysis video in this playlist: czcams.com/video/A8Pprbx2uQ8/video.html&pp=gAQBiAQB or the video on current ratio (where the outcomes can mean very different things, compared to textbooks pretending it can only either be good (when high) or bad (when low)): czcams.com/video/dkiSWO2OYho/video.html&pp=gAQBiAQB
I have been watching your videos for the last few weeks, your content and delivery is amazing. Thank you so much from India! I have one question regarding this video "Financial Ratio Analysis". In this video you have explained "Inventory Turn Ratio" as "Revenues divided by Inventory" and in my book it is shown as "Cost of goods sold divided by inventory"...please help.
Glad you like them! Greetings back from the Netherlands. The world of textbooks is often different from the way things get done in the real world. I discuss the difference between the two definitions in my video on inventory turnover: czcams.com/video/uhJV5fbVNYE/video.html
@TheFinanceStoryteller thank you so much for your response. I got it 👍
THANKS SIR
You're welcome, Ibrahim!
Hey buddy, can I just check on the working capital for company b, you said they seem to be getting paid by customer before having to pay suppliers, it’s seems it’s the other way round, they have to pay there suppliers (accounts payable) first before getting paid by the customer as there is more going out than in, did I get that right??
Hi Craig! In this video, we are looking at income statement and balance sheet only, we are not reviewing the cash flow statement (which would give us the opportunity to study actual cash inflows and cash outflows). Company A and B have the same level of revenue in the income statement. On the balance sheet, company A has high accounts receivable, high inventories, and low accounts payable. Company B has the opposite: low accounts receivable, low inventories, and high accounts payable. That's where my comment came from: "Company B seems to be getting paid by customers before they have to pay suppliers, and holds a low level of stock." See also my video on working capital management: czcams.com/video/c5iigcEppZw/video.html
Hi, does receivable turnover and debtors turnover are the same thing?
Yes, I think so. The former term would probably be used in the US, the latter in the UK.
I like your content. I subscribed you...
Wonderful, Bibhisan! Enjoy the videos, and let me know if you think any topics are missing.
Excellent explication
Thank you, Gaby!
Why did you not add cash and short-term borrowing to calculate the working capital? Working Capital = Current Assets - Current Liabilities; Can you please explain? Thanks
Working capital tends to get defined in textbooks as the current assets on a company’s balance sheet minus its current liabilities. However, there is a much more practical definition, used in everyday business life, that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable.
New Subscriber From Philippines
Welcome!!! The Philippines ranks 3rd in terms of number of views, after USA and India. Nice to have a fan base there. 😎
@@TheFinanceStoryteller 🥰🥰😍😍
if we were to invest in a company can we make a decision only by looking at their return on equity ratio?
No. Here are some suggestions on how to build an investment portfolio: czcams.com/video/K4mWd2zBYVk/video.html
Could I say that inventory turnover ratio might be COGS/average inventory.
Different companies and different people use different definitions of inventory turnover. Rather than asking what is the “right” definition, I would like to ask: what is the most useful definition? A: Inventory turns as the ratio between Sales and Inventory, or B: inventory turns as the ratio between Cost of Goods Sold and Inventory. When you drill down into the components, you will see that the first definition has units sold times the selling price per unit in the numerator, and units in stock times cost per unit in the denominator. The second definition has units sold times cost per unit in the numerator, and units in stock times cost per unit in the denominator. As cost per unit divided by cost per unit equals 1, you are in this second definition basically just dividing units sold by units in stock, and those are the only two variables that can be influenced when you strive for improvement. See also my video on inventory turnover: czcams.com/video/uhJV5fbVNYE/video.html
How do you make everything relative for the income statement? thank you
EDIT: ooooh I see you’re basically making it into a common size income correct?
In the income statement, things are usually expressed as a % of revenue. A company might have a gross margin of 70% of revenue, SG&A of 35% of revenue, and R&D expenses of 10% of revenue, for example.
for inventory turnover - dont we use cost of sales instead of revenues?
Different companies and different people use different definitions of inventory turnover. Rather than asking what is the “right” definition, I would like to ask: what is the most useful definition? A: Inventory turns as the ratio between Sales and Inventory (which is related to the DuPont analysis formula), or B: inventory turns as the ratio between Cost of Goods Sold and Inventory. When you drill down into the components, you will see that the first definition has units sold times the selling price per unit in the numerator, and units in stock times cost per unit in the denominator. The second definition has units sold times cost per unit in the numerator, and units in stock times cost per unit in the denominator. As cost per unit divided by cost per unit equals 1, you are in this second definition basically just dividing units sold by units in stock, and those are the only two variables that can be influenced when you strive for improvement. See my video on inventory turnover: czcams.com/video/uhJV5fbVNYE/video.html
Sir may I ask, why do you say that company A has lower leverage compared to company B? leverage in terms of what? The ratios clearly shows that the company A, relies on its equity than than company B who relies on borrowings. Can you please shed some enlightenment? Thanks
Hi Pandoy! Yes, you may always ask question, I enjoy those. High debt-to-equity ratio (company B) = high leverage. Low debt-to-equity ratio (company A) = low leverage. Much more on this in my video on financial leverage czcams.com/video/GESzfA9odgE/video.html
In the calculation of working capital, why did you not add cash to current assets? Should not the working capital of company A be 200 instead of 150?
Hello Pranav! That depends on which definition of working capital you use. Working capital tends to get defined in textbooks as the current assets on a company’s balance sheet minus its current liabilities. Current assets include items such as cash, marketable securities, accounts receivable, inventory, and prepaid expenses. Current liabilities include items such as short-term debt, accounts payable, accrued liabilities, and deferred revenue. There is a much more practical definition, used in everyday business life, that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable. See also my videos on working capital management: czcams.com/video/c5iigcEppZw/video.html
@@TheFinanceStoryteller Oh got it. Thanks for the detailed explanation!
By the way if you ever come back to check these comments you should know that I had not subscribed before the comment. It was only the post explanation that you gave that made me subscribe. Just letting you know that your comments help in conversion!
Welcome as a subscriber to the channel! I try to answer all comments from viewers. In terms of CZcams functionality, it is easier for me to see new comments than replies to earlier comments, but I try to stay on top of both. :-)
Why you didn’t calculate the cash for working capital ratio?
Thank you
Working capital tends to get defined in textbooks as the current assets on a company’s balance sheet minus its current liabilities. Current assets include items such as cash, marketable securities, accounts receivable, inventory, and prepaid expenses. Current liabilities include items such as short-term debt, accounts payable, accrued liabilities, and deferred revenue. There is a much more practical definition, used in everyday business life and in my videos, that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable. See also: czcams.com/video/c5iigcEppZw/video.html
I finally able to learn about financial ratio. I always invested without understanding this basic. Thanks for your explanation. It's easy and now i know how to write my own story.
By the way, i would to like about net margin and operating. If the margin are all in 2 digits instead 1 digit, what does it mean?
Glad it was helpful! 2 digits is 10% or above, 1 digit is between 0% and 10%. See also my video on gross margin versus operating margin: czcams.com/video/VCMJzG1AaXA/video.html
Quick Question: What's the other term for "Equity as % of Balance Sheet Total
"? TIA!
Hi Ryan! Well, I guess you could call it "Equity to Assets"? Any other suggestions?
@@TheFinanceStoryteller You coined it pretty well, buddy! Thanks and happy holidays!
Isnt it wrong to calculate Revenue-Inventory as inventory is taken at cost rather than selling price?
Different companies and different people use different definitions of inventory turnover. Rather than asking what is the “right” definition, I would like to ask: what is the most useful definition? A: Inventory turns as the ratio between Sales and Inventory, or B: inventory turns as the ratio between Cost of Goods Sold and Inventory. When you drill down into the components, you will see that the first definition has units sold times the selling price per unit in the numerator, and units in stock times cost per unit in the denominator. The second definition has units sold times cost per unit in the numerator, and units in stock times cost per unit in the denominator. As cost per unit divided by cost per unit equals 1, you are in this second definition basically just dividing units sold by units in stock, and those are the only two variables that can be influenced when you strive for improvement. In my opinion, option A: Inventory turns as the ratio between Sales and Inventory, is the most useful definition. See also czcams.com/video/uhJV5fbVNYE/video.html
@@TheFinanceStoryteller thanks!
Hmmm.. I not know, I'm thinking COGS
Please help me with this question 😭 How would you use a large number of ratios to perform a complete ratio analysis of the firm?
Hi! It sounds to me like you are trying to get me to answer a homework question for you. Why don't you watch my video on financial ratio analysis, see what is going on with the income statement and the balance sheet, and draw your own conclusions in order to answer the question. You will learn a lot more from it, and it only takes 10 minutes.
im trying to do all my work on the last days and im lost on a diffrent level even watching this
Sorry to hear that. Stay at it, take a break when you need it. Any specific questions I can help with?
how about DSCR ratio?
That is a very good one as well, but I have not made any video about it (yet). I am sure some of my "colleagues" on CZcams will have a useful video for you to walk you through it.
are you diving by the current assets or the total assets?
Hello William! I am discussing several financial ratios in this video, which of them are you referring to?
@@TheFinanceStoryteller Sorry, I was talking about the asset turnover ratio. I looked online and most are saying that you have to add the beginning and the end and get the average and divide that by the revenue.
Correct. Take 12 months of revenue in the numerator, and then divide by the average total assets in the denominator. You can either take a two-point average of assets on the beginning and ending balance sheet, or even a five-point average (beginning balance sheet and four quarter-end balance sheets). In the video, I tried to keep it very simple by having just one profit and loss statement and one balance sheet.
@@TheFinanceStoryteller Thank you! I figured it out. I need the starting asset and the ending. I had to look at the previous years.
Excellent videos. Are you Dutch?
Very much so! 😎
When calculating working capital why wouldn't you include cash as a current asset? Referring to 4:42 in the video. Thanks!
Hello James! I am explaining that in more detail in my videos on working capital czcams.com/video/XvHAlui-Bno/video.html and working capital management czcams.com/video/c5iigcEppZw/video.html but here's the short answer.
Working capital tends to get defined in textbooks as the current assets on a company’s balance sheet minus its current liabilities. Current assets include items such as cash, marketable securities, accounts receivable, inventory, and prepaid expenses. Current liabilities include items such as short-term debt, accounts payable, accrued liabilities, and deferred revenue. There is a much more practical definition, used in everyday business life, that focuses on those items that are (in real life) often the largest in amount and can be influenced/managed: accounts receivable, plus inventory, minus accounts payable. In that practical definition, if working capital goes up, then cash goes down. If working capital goes down, then cash goes up.
@@TheFinanceStoryteller Thanks so much for clearing that up for me!
@@jamesgibbons7188 Happy to help!
Nice
Very nice
I believe your inventory turnover is incorrect, should be cogs/inventory, it's a nice visual presentation
Hello Victor! There are multiple definitions of inventory turnover in use. I would argue that sales/inventory is better than cogs/inventory, as the former has a wider range of actions that impact the metric and create value for the company. See my video called "inventory turnover" for a full discussion: czcams.com/video/uhJV5fbVNYE/video.html
@@TheFinanceStoryteller can you provide any website, or books from any sources other than your own that would agree with you? If someone used the inventory turnover formula you provided on any finance/accounting exam, they would fail. I think your teaching methods are very good but being stubborn on this point would hurt your viewers if they used this for any exam reference.
Thanks for the feedback. I base my videos on real world examples and application, and write my videos to help manage real world businesses, not for people to pass exams. For example, a company like General Electric uses inventory turnover in the sense of revenue / inventory, as it points business leaders at 4 areas to improve: number of units sold (increase), selling price (increase), number of units in stock (decrease), production cost per unit (decrease). Plus the revenue / inventory way of defining nicely links to the DuPont formula's revenue / assets for asset turnover. The fact that textbook writing academics and examiners that may have never run a real business, use cogs / inventory is an alternative and in my view less effective way of defining metrics for your business. Plus it's good for students to understand as early as possible that there is ambiguity in the real world, so always check what someone means if they talk about a term like inventory turnover, .... or strategy!
Yes I'm first. So I get the worm. Heart me FST
Well done! :-)
I think there are some definitions are not right. For example, inventory turnover must be Cost of Good Sold divided average inventory amount. If we use revenue, the ratio will be overstated.
There is a difference between the world described in textbooks, and the real world.... Different companies and different people use different definitions of inventory turnover. Rather than asking what is the “right” definition, I would like to ask: what is the most useful definition? A: Inventory turns as the ratio between Sales and Inventory, or B: inventory turns as the ratio between Cost of Goods Sold and Inventory. When you drill down into the components, you will see that the first definition has units sold times the selling price per unit in the numerator, and units in stock times cost per unit in the denominator. The second definition has units sold times cost per unit in the numerator, and units in stock times cost per unit in the denominator. As cost per unit divided by cost per unit equals 1, you are in this second definition basically just dividing units sold by units in stock, and those are the only two variables that can be influenced when you strive for improvement. In my opinion, option A: Inventory turns as the ratio between Sales and Inventory, is the most useful definition. As a finance director in a company, you can help create value for this company by providing visibility of the drivers of this key ratio of inventory turns. See also my video on inventory turnover: czcams.com/video/uhJV5fbVNYE/video.html
Is the ideal ratios were different for different companies?
What are the ideal ratios of a government company?
Hello Amrutha! I don't think there are any "ideal" ratios. Each of them is the outcome of a calculation, and provides a piece of the puzzle in terms of the financial status of company.
@@TheFinanceStoryteller so, what is the basis for interpreting an ratio
When I use them, I compare the same company over the years, and different companies in the same year. If you compare ratios over time, you can judge whether they are going up or down. If you compare ratios between companies, you can rank high to low. Neither determines whether something is good or bad.
@@TheFinanceStoryteller my question is can I use the normal standard ratios in a Government company
I don't know. I have never tried it.
Which financial ratio(s) is/are the most insightful/useful for you? Let me know by commenting below!
return on equity and also debtors turnover ratio
@@babasrj1816 Hello Baba! I have several videos for you on Return on Equity and related concepts like ROA and financial leverage: czcams.com/video/6fA5N4giHrM/video.html
Finally , we Got an opportunity to see your face 😅
The Finance Storyteller.... more mysterious than The Stig! 😉
Why don’t you include cash in working capital?
I use the practical definition, used in everyday business life, that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable. See my series on working capital management: czcams.com/video/c5iigcEppZw/video.html
Alleen echte strijdes herkennen het Hollandsche accent :)
Ja ja! Een Nederlandse CZcamsr die op financieel en boekhoudkundig educatiegebied den strijd aangaat met de Amerikaanse en Canadese eenheidsworstdenkers. :-) Zegt het voort!
Are you Dutch?
Very much so! :-)
Hi again lol on the day sales outstanding, the 150 is a number of what? Invoices, money made? I can’t see why a higher number means more days, more accounts receivable should be better right, more people paying, but I suppose one could be charging more for an item and this have the same revenue for less accounts receivable?? Sorryyyy
150 is the outstanding balance on the balance sheet date (year end). DSO relates the outstanding balance at the end of the year to the revenue that you generated during the year. The lower the DSO the better, as DSO represents the average number of days that customers take to pay you. The definition of accounts receivable is: invoices to customers that they haven’t paid yet. It is a promise to pay in the future by your customer, and a right to collect for you. From a cash flow standpoint, this is a challenge, as you are basically supplying a free loan to your customer: you have delivered goods or services, but you have not been paid for them in cash yet. In order to manage cash flow, collect your accounts receivable as quickly as you can, and negotiate extended payment terms with your supplier. My preference is to get paid in advance for any work that I do, in that case the accounts receivable balance on the balance sheet date is zero (meaning there are no invoices that I sent that have not been paid yet). See my video on accounts receivable vs accounts payable czcams.com/video/x_aUWbQa878/video.html and the one on Days Sales Outstanding czcams.com/video/duN0BAY9Q8s/video.html
@@TheFinanceStoryteller ahhh so its a 150 different unpaid invoices?? , your amazing !!
My apologies! I should have put a $ or other currency sign in front of it to make it clear.
The Finance Storyteller ahh now I’m confused again, so it’s 150 million? I will watch the videos you recommended
It's either $150 in accounts receivable, and $1000 in revenue, or $150 million and $1000 million. 😉 Comes out to the same number of 55 days DSO once you divide them.
When calculating Working Capital and adding up the current assets i thought cash would be included. If not why not?
Working capital tends to get defined in textbooks as the current assets on a company’s balance sheet minus its current liabilities. Current assets include items such as cash, marketable securities, accounts receivable, inventory, and prepaid expenses. Current liabilities include items such as short-term debt, accounts payable, accrued liabilities, and deferred revenue.
There is a much more practical definition, used in everyday business life, that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable. See my video on working capital management: czcams.com/video/c5iigcEppZw/video.html
I think the inventory formula is wrong. It should be COGS/ av. inventory
There are two ways to calculate inventory turns: czcams.com/video/uhJV5fbVNYE/video.html I prefer using revenue/inventory, this is the more actionable of the two.
I like you.
Thank you! 🙂 Enjoy the videos.
You are Dutch...I can hear it.
10 points out of 10 for guessing that right!
@@TheFinanceStoryteller it would be wrong not to hear it when I lived there for a while. Many moons ago. :)
Hello why do you use balance sheet instead of STATEMENT of financial position
They are the same thing. The former is the more commonly used name, the latter the offical sounding name you find in annual reports.
5:07 working capital. If negative, getting paid by customers before paying suppliers
More discussion and real world examples of working capital in this playlist: czcams.com/video/c5iigcEppZw/video.html
Thank you
You're welcome, Reuben!