Financial Ratios

Novartis and Merck are currently the two largest pharmaceutical companies. They report in CHF and US$ respectively so ratios enable fair comparison between them.

Danone (France) and Nestle (Switzerland), multinational food groups reported profit margin ratios of 4.6% and 5.6% respectively in 1996. However Nestle's cash-flow margin was lower (14% vs. 14.4%). Nestle only began to capitalise and amortize goodwill in 1995, reporting a small amortisation charge in 1996. Danone's policy of capitalising intangible assets and amortizing them over their useful lives caused their 1996 profits to be lower by 865 million French Francs.

ROI ratios can give the low-down about how much of the profit declared is actually translated to earnings for the shareholders.

· Jack Daniels Distillery must carry its "stock" in casks for twelve years before it can be sold, making stock turnover ratios useless as a measure of efficiency.
· Taken out of context, a decrease in Free Cash Flow is alarming. However when seen in the light of an increased capital expenditure in that year especially for a company experiencing growth, is still a healthy sign.

Ratios from the categories for Gearing, Efficiency, Profitability and Liquidity, for instance provide an instant picture of the performance of that company.

Now-notorious internet companies presented remarkable figures for share prices and Price-Earning ratio but carefully hid Profitability and liquidity figures.

• Acid Test (quick Ratio)
• Current Ratio

• Capital Gearing Ratio
• Debt to Equity Ratio

• Flow Ratio
• Free Cash Flow

• [Net Profit Ratio
• Return on Equity
• Return on Invested Capital
• Return on Assets
• Gross Profit Ratio

• Stock Turnover Ratio
• Fixed Assets Ratio
• Trade Debtor Collection Period
• Trade Creditor Collection Period