10 Financial Terms of Investing explained 🧵🧵
1) EBITDA
2) PAT
3) ROE
4) ROCE
5) D/E Ratio
6) Acid Test Ratio
7) Working Capital Turnover
8) PE
9) PS Ratio
10) Interest Coverage
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1) Earnings before Interest Tax Depreciation & Amortization (EBITDA) margin -
It shows how efficiently an organization is operating.
Ratio = EBDITA / Net Sales
EBITDA = Operating Income (EBIT) + Depreciation + Amortization
EBDITA Margin of 10% and more is considered good.
2) PAT Margin -
Its similar to EBDITA Margin, the only difference is - it is calculated after taxes.
PAT Margin = [PAT/Total Revenues]
A good margin will vary considerably by industry, but as a general rule of thumb, 5% is low, 10% is avg and 20% can be considered high
3) Return on equity
It indicates how much return the shareholders are making over their initial investment in the company
ROE - [Net Profit / Shareholders Equity* 100]
Generally 15%+ ROE can be considered to invest in a company with a good cashflow and low debt.
4) ROCE - Return on Capital Employed
Return on Capital employed indicates the overall return the company generates considering both the equity and debt
ROCE = [Profit before Interest & Taxes / Overall Capital Employed]
ROCE of 15% and above is considered good