Dividend Cover

This show how many times over the profits could have paid the dividend. For example, if the dividend cover is 3, this means that the firm's profit attributable to shareholders was three times the amount of dividend paid out.

Dividend Cover   =             Pat  - Prefereance Dividend   

                                                 Ordinary Dividend 

Dividend cover is a measure of the ability of a company to maintain the level of dividend paid out. The higher the cover, the better the ability to maintain dividends if profits drop. These needs to be looked at in the context of how stable a company's earnings are: a low level of dividend cover might be acceptable in a company with very stable profits, but the same level of cover at company with volatile profits would indicate that dividends are at risk. 

Because buyers of high yield shares tend to want a stable income, dividend cover is an important number for income investors. 

 

The inverse of this ratio is the proportion of earnings that belong to ordinary shareholders which are distributed to them. This is known as the dividend payout ratio.

A company who has a dividend cover ratio of 1.0 pays out all earnings in dividends. This means that should earnings fall, the company might be forced to cut annual dividend payments. If the company has financial reserves, it may be able to make the annual payment from these cash reserves in the short term.

Many firms use annual dividend payments as a signal to shareholders and the market of confidence, so in the short term, directors will be reluctant to reduce payments, unless the firm is in trouble.

Dividend Payout

The dividend payout ratio measures the percentage of a company's net income that is returned to shareholders in the form of dividends. 

          Dividend Payout =                       Ordinary Dividend       

                                                        Pat - Prefereance Dividend

The Dividend Payout Ratio is a model for Cash Flow Measurement used by investors to determine if a company is generating a sufficient level of cash flow to assure a continued stream of dividends to them. It is also a measurement of the amount of current net income paid out in dividends rather than retained by the business.

The Dividend Payout Ratio Formula (Cash Flow Measurement Formula) is relatively straightforward: Divide total annual dividend payments by annual Net Income plus Non-cash Expenses minus Non-cash Sales.

Calculating the Dividend Payout Ratio for one year provides a very unreliable indication only. A better approach is to run a trend line on the ratio for several years to see if a general pattern of decline or increase emerges.

This ratio is useful in projecting the growth of company as well. Its inverse, the Retention Ratio (the amount not paid out to shareholders in the form of dividends), can help project a company’s growth.

Measuring Liquidity

Current Ratio

Current Ratio      =                                Current Assets        X 100

                                                             Current Liabilities           

The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.

The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. Because business operations differ in each industry, it is always more useful to compare companies  within the same industry.

This ratio is similar to the acid-test ratio except that the acid-test ratio does not include inventory and prepaid as assets that can be liquidated. The components of current ratio (current assets and current liabilities) can be used to derive working capital (difference between current assets and current liabilities). Working capital is frequently used to derive the working capital ratio, which is working capital as a ratio of sales.

Quick Ratio

An indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company.

The quick ratio is calculated as:

  Quick Ratio       =         Current Assets   - Inventory     X 100

                                                         Current Liabilities              


The quick ratio is more conservative than the current ratio, a more well-known liquidity measure, because it excludes inventory from current assets. Inventory is excluded because some companies have difficulty turning their inventory into cash. In the event that short-term obligations need to be paid off immediately, there are situations in which the current ratio would overestimate a company's short-term financial strength. 

Receivable Days

Receivable days measures the average no of days that a company takes to collect revenue, after a sale has been made. This ratio is an index of the relationship between outstanding receivables and sales achieved over a given period of time.

When a company does credit sales, company will have debtors. There is a credit policy which specifies the no of days given for the customers to pay their amount dues. Thereby the no of days extended depend on the industry. Management should be efficient to collect its debts quickly. Actually this ratio measures the management efficiency. Because it’s important for the liquidity of the company. When the company turns the sales into cash quickly, the company gets a chance to place the cash to use again, normally to reinvest and make more sales.

When the company shortens the receivable days too much it could lose customers. Same as that if the company gives more time for the customers to pay their bills then the company might face a cash shortage. Less no of days is better for the company.

Sometimes high no of receivable days indicates the customers are dissatisfied with the company's product or service, or sales are being made to customers that are less credit-worthy, or sales people have to offer longer payment terms in order to generate sales. 

Receivable Days              =              Closing trade receivables x 365

                   Revenue

Inventory Days

Successful inventory management is an essential part of a company. Too much inventory means paying for storage, possible waste or theft, the opportunity cost that the time and space used to hold onto inventory that remains unsold could have been used instead to buy products that would sell. Having too little inventory, on the other hand, could lead to shortages and possibly missed sales opportunities.

Inventory days indicate the average no of days goods remain in the inventory before being sold. The process of turning of raw materials into cash. Inventory days can be called as days cover, days of inventory or days sales to inventory.

 Inventory days        =               Closing Inventory x 365

                                                       Cost of sales (Revenue)

Lower the no of days in the inventory emphasis the company efficiency. It increases the company liquidity level as well. In other hand low inventory days indicates company is not keeping enough stock on hand to meet demands. Higher the no indicates that there is lack of demand for the product being sold.

Payable Days

Accounts Payables are the debts that must be paid off with in a given period of time. It is the unpaid invoices, bills statement of goods or services rendered by the outside contractors, vendors or suppliers. There is a credit policy which agreed between the company and other party like suppliers. Accounts payables are often referred to as “Payables”. This is a ratio measures how long a company is taking to pay its trade creditors. Trade payables appears on the company‘s balance sheet under current liability section.

Paying bills on time and according to the specific terms and conditions can affect company credit ratings and ultimately business relationships. If the payable days are low it implies that the company pays its liabilities quickly. Normally it’s better to have a larger no of payable days. Because the longer company holds money before paying its bills, company could earn more money by placing money in the bank. This is only true if the company does pay its creditors. But if the company takes long time to settle the payments, the company will be considering as a not worthy company in the industry.

But there may be different terms and conditions exist in which payment for a service is expected. Such as some of the services require payment upon receipt, which means compensation is due immediately after the service is rendered. Others have 10, 30, or 90 day terms in which payment is accepted. Not only that in credit lines, where payment is due once a month, is also a standard practice.

However the accounts payable administrator should keep track of terms and conditions, whether they are following accordingly, otherwise it will create a bad impression of the company within the industry.

                    Payable Days              =           Closing trade payables x 365

         Cost of sales