In the stock market, there are many ratios that one can use to analyze the financial health of a publicly traded company. When reading financial articles about companies, there are often important stock ratios that aren’t included. These important stock ratios show you the financial condition of a company, and also tell you how well the people in management are doing their jobs.
Income per Employee – Employees are a big, if not the biggest, expense for a company. Companies must pay employee benefits, employee wages, match their FICA taxes, match their 401K contributions, etc. So it’s easy to see how expensive employees can be. Although they are expensive, employee’s are vital to a companies success. So, the income per employee ratio shows just how much money is made in income, for every employee. Net Income for Year / Number of Employees = Net income (or loss) per employee. The higher the income per employee, the better.
Accounts Receivable Turnover Ratio – Many publicly traded companies would not be in business today if they did not allow their customers to buy merchandise on credit. The amount of money owed to a business from it’s customers is referred to as Accounts Receivable. Net Sales / Balance of Accounts Receivable = Accounts Receivables Turnover Ratio. You can find the amounts you need in the Annual Report of a company. The higher the A/R Turnover Ratio, the more quickly a company is able to get the money that’s owed to them. Here’s another useful formula: 365 / Accounts Receivables Turnover Ratio = Number of Days it takes for a company to fully collect the money owed to them.
Current Ratio – The current ratio basically tells you if a company has enough assets in case it needs to immediately pay off any debt. Total Current Assets/ Total Current Liabilities = Current Ratio. The higher the current ratio, the better of a company is. Any current ratio above 1 is considered good. Companies just starting out will usually have a current ratio less than 1.