Financial Ratios - Measuring Financial Health
Chapters in this video
- 0:00 Liquidity pulse check: working capital, current ratio, and quick ratio
- 1:47 Quick ratio excludes inventory: why inventory is the least liquid asset
- 2:51 Solvency and bone density: debt-to-equity and total capitalization
- 4:17 Efficiency metabolism: inventory turnover and cash flow add-backs
- 5:03 Profitability muscle: gross vs. net margin and return on equity
- 6:14 Bond interest coverage: EBIT, not net income
- 6:48 Book value per share: subtract intangibles and preferred stock
- 7:16 Valuation copay: PE ratio and dividend payout ratio
- 8:34 Rapid-fire exam recap
What this video covers
- How working capital, the current ratio, and the quick ratio differ in measuring shortterm liquidity, and why the quick ratio excludes inventory
- What total capitalization includes and excludes, and why omitting preferred stock is a classic exam trap
- How to calculate and interpret the debt-to-equity ratio, and why rising leverage threatens bondholders as well as stock investors
- What inventory turnover and cash flow measure, and how to add back depreciation, depletion, and amortization to net income
- The distinction between gross profit margin and net profit margin, and why return on equity is the key comparative performance measure
- Why bond interest coverage uses earnings before interest and taxes (EBIT), not net income, and what book value per share excludes
- How the price-to-earnings (PE) ratio uses market price, not book value, and why the dividend payout ratio plus the retention ratio equals 100 percent
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