Computing Important Stock Ratios

• 1). Obtain the most recent balance sheet. This will be either a quarterly or annual statement. On the asset side of the balance sheet, locate the current assets. Subtract the inventory entry. Divide the result by total current liabilities. The result is the quick ratio, the most conservative measure of cash paying ability. Track for the previous five periods to see the trend.
  
  
• 2). Locate the current asset portion of the balance sheet. Subtract from the current asset portion the current liability entry. The result is the current ratio. Working capital is the single most referred-to measure of short-term financial strength. Compare the working capital to the average monthly cash needs of the company for an indication of how long current cash needs can be met without further inflows.
  
  
• 3). Compute the total liabilities of the company. Liabilities consist of all short-term and long-term debt. Divide this sum by the shareholder's equity. Shareholder equity is the difference between all assets and all debt of a company. The result produces a number that should be similar for other companies in the same industry and a valuable tool for comparing the ability to safely carry debt.
  
  
• 4). Use price to cash flow as a very accurate indicator of a company's real earning ability. Cash flow is all cash earnings of a company. Cash flow does not include the effect of depreciation or other non-cash accounting issues. Divide the current stock price by the cash flow. The result shows how much cash flow the company generates per share owned. Price to cash flow is more valid than the popular price-to-earnings ratio.
  
  
• 5). Compute equity per share to get a snapshot of the company's current net worth. Equity per share is determined by dividing the shareholder's equity by the number of shares outstanding. Compute shareholder equity by subtracting all liabilities from all assets. The result is the minimum value the shareholder should expect if the company is sold.