## 6 FINANCIAL RATIOS

### Key Ratios

**Return on Capital Employed (ROCE)** - the amount a company earns by using its available capital. It measures how efficiently a company uses its capital. This ratio is calculated by dividing the net operating profit, which is the Earnings Before Interest and Tax (EBIT), by the capital employed. The EBIT is obtained from the Profit and Loss Account and the Capital Employed is found on the Balance Sheet as Total Equity.

ROCE = EBIT / Capital Employed (Total Equity + Total Debt)

**Price-Earnings Ratio (P/E)** - shows how much of the curent share price is covered by current earnings. The ratio is calculated by dividing a company's current share price by its earnings-per-share. It's often used with a selection of other company's value to compare the potential earnings of each compamy.

**Current Ratio** - shows the a ability of the company to pay off debts that are due in the next twelve months from readily available assets. These assets can include cash on hand, accounts receivable and inventory. The ratio is worked out by dividing the current assets by the current liablities. The current assets and liablities are found in the oompany's balance sheet.

**Debt-to-Equity Ratio** - the ratio shows how much if any the company uses debt to finance its operations. The ratio is calculated as the total liabilities divided by the total shareholder's equity. The ratio is used to assess the extent of company's reliance on debt.

**Price-Earnings-to-Growth Ratio (PEG)** - relates the company's share price and earnings to its expected growth rate. To determine the PEG ratio, the P/E ratio is divided by the expected earnings growth rate.

**Price-to-Book Ratio (P/B)** - compares a company's stock price to the value of its assets on the balance sheet. A company's book value is equal to its total assets, less its liabilities. Note that this is the same value as the company's shareholders equity.
Price-to-book value (P/B) is the ratio of the market value of a company's shares over its book value of equity. The book value of equity, in turn, is the value of a company's assets expressed on the balance sheet.

**Return on Equity (ROE)** - measure of how effectively a company uses shareholder equity to generate income.

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