Private company in HK is considered to be a company with turnover over 5 MM HKD and audited annual financial statements. It has to owned privately.
Listed company in HK is considered to be a company listed on a
Hong Kong stock exchange. It has to have semiannual audited reports and observed equity prices.
Balance sheet in HK - example
CHINA MOBILE Balance sheet
Income statement in HK - example
CHINA MOBILE income statement
Cash flow statement in HK - example
CHINA MOBILE Cash flow statement
FINANCIAL RATIOS
- we use them to compare companies between each other following the Balance sheet, Income statement and Cash flow statement. They represent important moves in the company as they may be observed between periods.
Liquidity ratios
- ratios to describe the ability of the company to pay back liabilities, usually concentrated on cash
current ratio = current assets / current liabilities .... as high as good, as we prefer short term assets to be covered by long term debts. Preferable by banks close to 1.
quick ratio = ( cash + marketable securities + A/R ) / current liabilities ..... as high as good. It is showing the power of company to pay back the short term liabilities.
cash ratio = (cash + marketable securities) / current liabilities ...... as high as good. It is showing direct payback of money to short term liabilities. Preferably to be not over 1.
Turnover ratios
- ratios to describe turnover of an asset/liability in a company. Usually it is connected to short term assets or liabilities.
receivables turnover = Annual sales / Average accounts receivables .... as high as good. It is showing on average how many times does A/R turnover in year
payables turnover = Annual purchase / Average trade payables .... as low as good. It is showing the trustfulness of the company by suppliers.
inventory turnover = Cost of goods sold / Average inventory .... as high as good. It is pointing out how long, on average, needs a stock to stay on a warehouse before it gets sold. It might be considered to calculate a duration of the warehouse instead of turnover as it might better show any possible problem with not good selling stock purchased by a high prices.
days of sales outstanding = 365 / receivable turnover ..... as low as good. It is showing how long maturity does volume weighted A/R have. It is usually compared to maturity shown on the real A/R. Once is is growing it is a signal for a bank to ask for a reasons.
days of inventory on hand = 365 / Inventory turnover ..... as low as good. It is pointing out how long, on average, needs a stock to stay on a warehouse before it gets sold. It might be considered to calculate a duration of the warehouse instead of turnover as it might better show any possible problem with not good selling stock purchased by a high prices.
days of payables = 365 / payables turnover ..... as high as good to certain level. Increasing number is showing two things. First one is positive, as the suppliers trust the company more, second one is bad, as the company does not have money to pay back liabilities. It is usually the last way how to pump missing cash flow to company.
cash conversion cycle = days of sales outstanding + days of inventory on hand - days of payables ..... as low as good. It is showing how much cash need is company consuming on working capital
Operating efficiency ratios
- describing how effective company is.
Cross profit margin = Gross profit / Revenue .... as high as good. Usually it starts around 10% for trading companies and 30% for manufactures.
Operating profit margin = Operating profit / Revenue = EBIT / Revenue ..... as high as good. Usually it is expected not to go under 7%
Net profit margin = Net income / Revenue ...... as high as good. Usually is is around 1-2 % at least
Return on total capital = ROC = EBIT / Average total capital ..... as high as good. Capital is made of Preference shares/hybrid source of finance, Ordinary preference shares, Cumulative preference shares, Participating preference shares, Ordinary shares, Bonus shares, Founders' shares. Expectation is therefore made of weighted average of the costs of each part of capital.
Return on total equity = ROE = EBIT / Average total equity ..... as high as good.Usually is a function of risk free interest rate for 30 years "r", expected market return and beta as the risk of the business in comparison to market. Than:
ROC = r + beta *( rm - r)
.... beta can be observed on
APPLE beta
.... r for 30 years can be observed on
30 years US treasury
.... rm .... expected market return ..... 5-40% ... it is counted on industry average ....
S&P 500 historical prices
Return on common equity = EBIT / Average common equity
Solvency ratios
Debt-to-equity ratio = Total debt / Total shareholder's equity ..... as low as good. Usually it is pointing out for 4.
Debt-to-capital ratio = Total debt / Total debt ? Total shareholder's equity ..... as low as good. Usually it is looking forward not to overtake 5. It varies by country and economical cycle.
Debt-to-assets ratio = Total debt / Total assets ..... as low as good. Usually looking on number nut higher than 0,5
Financial leverage = Average total assets / Average total equity .... as low as good. The most importantly is to cover long term assets by long term money.
Coverage ratios
Interest coverage = EBIT / Interest payments ..... as high as good. Looking forward to be at least 1,4
Fixes charge coverage = EBIT + Lease payments / Interest payments + Lease payments .... as high as good. Looking forward to 1,4 at least
DU PONT EQUATION
ROE =
( Net income / Sales ) * (Sales / Assets) * (Assets / Equity) = net profit margin * Assets turnover * Leverage ration
EXTENDED DUPONT EQUATION
ROE = (Net income / EBT) * (EBT / EBIT) * (EBIT / Revenue) * (Revenue / Total Assets) * ( Total Assets / Total Equity) = tax burden * interest burden * EBIT margin * Asset turnover * Financial leverage
Growth rate
Growth rate = (1 - dividends declared / Operating income after taxes) * ROE
