Fundamental Analysis

Return on Invested Capital measures a companies net operating profit as a percentage of the leverage that they are using.  Leverage, or total invested capital in the formula below, in this context can be defined as:  Assets - Cash & Cash Equivalents (Cash, Accounts Receivable, Short term investments) - Long Term Investments - Current Liabilities.  These data points can be found on the balance sheet.

The term profit margin refers to the amount of money a company makes after it subtracts the cost of goods sold from the gross revenues.  The profit margin is represented as a ratio for benchmarking purposes.  A company may use the profit margin ratio to compare it against the profit margin from previous periods or for purpose of comparison to a similar company or the industry average. 

Return on assets is a key profitability ratio which measures the amount of profit made per dollar of assets that they own.  It measures the companies ability to generate profits before leverage with it's own assets, rather than by using leverage in the form of shareholders' equity or other 

Profitability ratios measure a companies financial performance and its ability to increase its shareholders value and generate profits.  Profitability ratios provide insight into the profits made by the company in relation to its size, assets, and sales and also measure the companies performance in relation to itself.  Having past data as a benchmark, the firm can start

Common stock represents an ownership interest in a corporation.  Rather than purchasing bonds, of which most have a fixed rate of return, investors look to purchase an equity stake for the possibility of stock price appreciation.  While common shares

What is Preferred Stock?

The Altman Z-Score calculation integrates a few important financial ratios together in order to arrive at a probability of bankrupcy for a company.  The Z-Score model has been configured to assign different weighting to each of these ratios in proportion to their importance.  As with any formula, you cannot apply a broad stroke over the entire marketplace; therefore, Altman created different weighting for different sectors in this market such as Private Firms, manufacturers, & industrial companies.

Components of Z Score

Let's review the components, referenced as Z1 - Z5

Z1 = Working Capital / Total Assets

Effectively measuring and managing inventory is essential in keeping a companies financial statements up to date; inventories are a part of the balance sheet and are represented as short-term assets.  Inventory can be defined as assets that are held for the purpose of sale or inventory can refer to assets that are being converted to a form which can be sold or even assets that assist in the production of goods which will be sold. 

By using a combination of assets, debt, equity, and interest payments, leverage ratio's are used to understand a company's ability to meet it long term financial obligations.  The three most widely used leverage ratio's are the debt ratio, debt to equity ratio, and interest coverage ratio. 

Accounts payable is an account of unpaid debt for goods & services received.  A/P is an obligation that a company or individual is under to pay unpaid bills or invoices to venders or service providers.  Accounts payable is listed as a current liability on the balance sheet.  You can look at A/P as an IOU from you to the creditor. 

The term Return on Equity, or ROE, measures the amount of profit that a company generates through the use of shareholders' equity.  ROE is one of the most important profitability ratio's measuring management's ability to perform in areas of profitability, asset management, and financial leverage.  It is calculated by dividing net income by average common shareholders equity.  The reason we use an average here is due to the fact that common outstanding shares can fluctuate in size throughout the year.  Companies may bring additional shares to the market or actually buy them back depending on their cash needs and expectations for the future. 

The PEG ratio, or price/earnings to growth, is a valuation tool which takes the p/e ratio one step further by integrating a companies expected growth numbers; hence the G in PEG.  Similar to the P/E Ratio, PEG is designed to give a relative valuation to how cheap or expensive a stock is.