RATIO ANALYSIS

　

Ratio Analysis is used as a way of analyzing the performance of a company. It covers five major areas, namely, (i) Liquidity, (ii) Leverage, (iii) Profitability, (iv) Efficiency and (v) Market Value.

　

Liquidity Ratios are used to measure the short-term solvency of a company. They show the ability of the company to quickly convert its assets into cash to pay its short-term debts. The higher the ratios, the more liquid the company and the less likely the company experience financial distress in short-term basis.

　

Current Ratio = Current Assets / Current Liabilities

　

Interest Coverage Ratio = Earnings before Interest and Tax (EBIT) / Interests

　

Quick Ratio = (Current Assets -Inventory) / Current Liabilities

　

Leverage Ratios are used to measure the extent of the company's financing with debt relative to equity and its ability to cover interest and other fixed charges. They address the company's long-term ability to meet its financial leverage. The higher the ratios, the more indebtedness the company owes, which signals the possibility the company will be unable to earn enough to satisfy its debt obligations.

　

Long-term Debt/Equity Ratio = Long-term Debt / Equity

　

Total Debt/Equity Ratio = (Short-term Debts + Long-term Debts) / Equity

　

Profitability Ratios measure the overall earning performance of a company and its efficiency in utilizing assets, liabilities and equity.

Net Profit Margin = Net Profit after Taxation / Turnover

Operating Profit Margin = Operating Profit / Turnover

Return on Equity = Net Profit after Taxation / Equity

Return on Total Assets = Net Profit after Taxation / Total Assets

　

Return on Capital Employed = Net Profit after Taxation / (Total Assets - Current Liabilities)

　

Efficiency Ratios demonstrate how efficiently the company uses its assets and how efficiently the company manages its operations.

Inventory Turnover = Turnover / Inventory

Assets Turnover = Turnover / Total Assets

　

Market Value Ratios are used for value comparison. These Ratios are not contained in financial statements and they can only be calculated from publicly traded companies.

Price Earning Ratio = Current Stock Price / Earnings Per Share (EPS)

Market-to-Book Ratio = Market Value of Equity / Book Value of Equity

　

　

Ratios for Banking Sector

　

The following ratios are used to assess the adequacy of the liquidity of the banks and ensure the banks have adequate cash flow to meet all obligations in a timely and cost-effective manner.

Capital Adequacy = Capital Base (Tier I + Tier II) / Risk-weighted Assets

　

Core Capital Ratio = Tier I Capital / Total Assets

　

Liquidity Ratio = Liquefiable Assets / Qualifying Liabilities

Cost-to-Income = Operating Expenses / Total Operating Income

　

Pursuant to the consolidated basis required by the Hong Kong Monetary Authority (HKMA) and the Banking Ordinance, all the banks in Hong Kong should have Capital Adequacy over 8%, Core Adequacy Ratio over 4% and Liquidity Ratio over 25%.

Liquefiable Assets mainly comprise net amount of 1-month inter-bank deposits, HK Dollar or foreign currency notes and coins, gold, marketable securities and advances maturing within one month.

Qualifying Liabilities are mainly net 1-month inter-bank liabilities and the total of other 1-month liabilities.

Tier I Capital includes common equity, retained earnings, paid-in capital and disclosed capital reserves.

Tier II Capital includes loan loss reserve or undisclosed capital reserves, preferred stocks with maturity of at least 20 years, certain revaluation reserves and general loan provisions, subordinated debt with an original maturity of at least 7 years.

　

　

Other Fundamental Indicators

Earnings Per Share (EPS) = Net Profit after Taxation / Issued Common Shares

Dividends Per Share (DPS) = Dividends / Issued Common Shares

Net Asset Value (NAV) = (Total Assets - Total Liabilities) / Issued Common Shares