Compare Asset Turnover across Different Sectors

In the article “Calculate Asset Turnover Ratio”, we explained what asset turnover ratio is and why it is important to a company. We also used Caterpillar’s real net income statement and balance sheet to show how to calculate a company’s asset turnover ratio. Furthermore, in the article “DuPont Equation and Its Implication”, it is showed that actually asset turnover ratio is one of the components that affect company’s return on equity. In this article, we are going to compare asset turnover ratio across different sectors to see if asset turnover ratio difference exists or not.

Methodology

Sector Categorization

We categorize companies into nine sectors based on Yahoo Finance definition. The nine sectors are Basic Materials, Conglomerates, Consumer Goods, Financial, Healthcare, Industrial Goods, Services, Technology, and Utilities.

Company Selection

Among all tradable companies, we choose those that can be traded by options. The reason for that is because we would like to select companies that have certain liquidity. The company that can be traded by options means that they have certain liquidity. Currently there are 2825 companies that is option tradable.

Profit Margin Calculation

1. use Stock Financial Statements Download (SFSD) to batch download all target companies’ most recent net income and balance sheet statement
2. calculate each company’s asset turnover ratio by formula: Revenue/Average Total Asset
3. Compile the calculated company asset turnover according to the sector it belongs to
4. use the median asset turnover number of the specific sector to represent the sector’s profit margin
Note the median is used instead of average to avoid the distortion due to long tail distribution

Result

Following table is the calculation result
 


There are several observations we can make from this table:
1. Among those 9 sectors, Consumer Goods and Services have high asset turnover ratio
2. If we take a look at the compiled data from article “Compare Profit Margin across Different Sectors”, consumer goods and service sectors have low profit margin.
3. For Consumer Goods sectors, we do expect to see low profit margin and high asset turnover ratio because consumer products tend to have low profit margin and company earns profit by high volume sales. As for Services sector, need to investigate further to find out the reason.
4. Financial Sector has extremely low asset turnover ratio

Further Analysis

We can further breakdown the data more into different industries inside each sector. Click here to download the raw data
By investigating industry breakdown data, we can found out the reason why Services sector also has high asset turnover ratio is because some industries in Services sector are actually retailers such as drugs wholesale. The real ‘service’ industries such as business service and management service do have low asset turnover ratio and that’s what we expect.
Following is the screenshot of asset turnover ratio distribution among Services sector.
 

Stock Daily Quotes Tracker V 1.12 Available Now

We are pleased to announce that the Stock Daily Quotes Tracker (SDQT) version 1.12 is released! ! If you have purchased this software before, you can upgrade to the latest version simply by visiting out website or clicking ‘Help->Check Version’ from software.
 

What’s New in Version 1.12

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For the version before 1.12, the internet connection is not stable. Sometimes the software will simply freeze for a very long time when retrieving stock quotes from Yahoo Finance website. This problem has been solved.
 

Retrieve Stock Information from Popup Menu

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Following is sample screenshot to show the new features
 

 
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Compare Profit Margin across Different Sectors

In the article “Calculate Profit Margin”, we explained what is profit margin and why it is important to a company. We also used Caterpillar’s real net income statement to show how to calculate a company’s profit margin. Because profit margin is a ratio to measure a company’s profitability, we would like to know if different business sectors have different profit margin due to the nature of the business operation. In this article, we are going to compare profit margin across different sectors to see if profit margin difference exists or not.

Methodology

Sector Categorization

We categorize companies into nine sectors based on Yahoo Finance definition. The nine sectors are Basic Materials, Conglomerates, Consumer Goods, Financial, Healthcare, Industrial Goods, Services, Technology, and Utilities.

Company Selection

Among all tradable companies, we choose those that can be traded by options. The reason for that is because we would like to select companies that have certain liquidity. The company that can be traded by options means that they have certain liquidity. Currently there are 2825 companies that is option tradable.

Profit Margin Calculation

1. use Stock Financial Statements Download (SFSD) to batch download all target companies’ most recent net income statement
2. calculate each company’s profit margin ratio by formula: Net Income / Revenue
3. Compile the calculated company profit margin according to the sector it belongs to
4. use the median profit margin number of the specific sector to represent the sector’s profit margin
Note the median is used instead of average to avoid the distortion due to long tail distribution

Result

Following table is the calculation result

Sector	Sample Number	Median Profit Margin
Financial	521	0.17
Utilities	92	0.08
Technology	518	0.06
Industrial Goods	232	0.06
Basic Materials	357	0.06
Consumer Goods	253	0.05
Services	574	0.04
Healthcare	274	0.04
Conglomerates	4	0.035

There are several observations we can make from this table:
1. In this particular year (2012), financial sector has incredibly high profit margin compared to other sectors. We believe it has something to do with rebound from financial crises.
2. Exclude Financial sector, utilities sector has the highest profit margin, followed by technology, industrial goods, and basic materials sectors
3. Conglomerates sector has the lowest profit margin. However, it’s hard to make a conclusion because the sample is too small (only 4)

Further Analysis

We can further breakdown the data more into different industries inside each sector. Click here to download the raw data


From the breakdown table, we can see that there are some industries that could have high profit margin even though the sector they belong to has low profit margin. Take Cigarettes industry for example, it belongs to consumer goods sector, which has median profit margin 5%. However, this industry has median profit margin 25%.
We can plot the raw data to see the distribution:
It is obvious that even belongs to the same sector, profit margin across different industries can be huge different. Take consumer sector for example, cigarettes industry can have 25% profit margin, while farm products industry only has 1% profit margin

DuPont Equation and Its Implication

In the article “Calculate Profit Margin”, we mentioned that even though we prefer a company with high profit margin, it does not necessary mean this company has high return on equity. To the end, return on equity (ROE) is still one of the most important ratios to influence investment decisions. However, there is a relationship between ROE and profit margin. In this article, we are going to derive the relationship between ROE and profit margin (DuPont Equation) and explain how to use it to make investment decision.
 

ROE Decomposition

Return on Equity (ROE) is a ratio to measure the return on the shareholder’s equity. That’s the reason why it influences investment decision so much. The formula of ROE is simple:
ROE = Net Income / Average Shareholder’s Equity
Note here we use average shareholder’s equity instead of shareholder’s equity for calculation. It is because shareholder’s equity never constant during the fiscal period. It is better to use averaged shareholder’s equity during the fiscal period than the one at the end of fiscal period.
We can make first level decomposition of the above formula:
ROE = (Net Income / Average Total Assets) * (Average Total Assets / Average Shareholder’s Equity)
In the article “Calculate Financial Leverage”, we showed how to calculate financial leverage from debt-equity ratio. Because a company’s total assets = debt + equity,
=> Average Total Assets / Average Shareholder’s Equity = Financial Leverage
=> ROE = Return on Assets * Financial Leverage
We can further decompose return on assets (ROA):
ROA = Net Income / Average Total Assets
= (Net Income / Revenue) * (Revenue/Averaged Total Assets)
While Net Income / Revenue is profit margin and Revenue / Averaged Total Assets is
Asset turnover ratio
Now we derived the final format of DuPont equation:
ROE = ROA * Financial Leverage
= (Net Income/Revenue) * (Revenue/Averaged Total Assets) * (Averaged Total Assets/Averaged Shareholder’s Equity)
=> ROE = Profit Margin * Asset Turnover Ratio * Financial Leverage
 

Implication

From the formula above, it implies that we can always breakdown a company’s ROE into three elements: profit margin, asset turnover ratio, and financial leverage. By breaking down a company’s ROE into these three elements allows us to further investigate the main driver of a company’s ROE.
 

High Profit Margin as ROE Driver

Some industries tend to have high profit margin as their ROE driver. That means they tend to sell less units of product but each unit sold need to have high profit margin to have competitive edge
 

High Asset Turnover Ratio as ROE Driver

Some industries tend to have high asset turnover ratio as their ROE driver. That means they try to sell as many goods as possible in order to maintain proper ROE. Sudden drop of sales volume might hurt their ROE
 

High Financial Leverage as ROE Driver

Some industries tend to have high financial leverage as their ROE driver. That means they try to generate profit by borrowing other people’s money. However, high financial leverage accompanies high financial risk.

Calculate Asset Turnover Ratio

In the article “Calculate Profit Margin” and “Calculate Financial Leverage”, we showed how to calculate the profit margin from the company’s net income statement and its financial leverage from the balance sheet statement. In this article, we are going to discuss the asset turnover ratio, which is less heard from public. However, with the understanding of profit margin, financial leverage, and asset turnover ratio, we can breakdown return on equity (ROE) into these three elements and give us more insight in terms of the source of a company’s ROE. We are going to use net income and balance sheet statement from MSN Money website as an example to show you how to calculate asset turnover ratio
 

What is Asset Turnover Ratio

Asset turnover ratio is a ratio to measure business’s efficiency to generate revenue by using its asset. The higher the asset turnover ratio a company has, the more efficient a company is to generate revenue by its asset. The basic idea behind asset turnover ratio is that a company’s asset is a valuable resource. Generally a company increases its asset either from the contribution of shareholders or through the debt issuance. If a company can’t operate its asset efficiently, (e.g. generate revenue) investors might put their resources (money) to somewhere else to have better usage.
Asset Turnover Ratio = Revenue / Averaged total asset
Note we use averaged total asset during the fiscal period instead of total asset at the end of fiscal period because total asset fluctuates during the fiscal period while revenue is generated. It makes more sense to use averaged total asset to calculate the ratio
 

Calculate Asset Turnover Ratio from Net Income and Balance Sheet Statement

Because we need to know both a company’s revenue and averaged total asset in order to calculate asset turnover ratio, we need both the company’s net income and balance sheet statement in order to calculate asset turnover ratio. In the following example, we are going to use net income and balance sheet statement from company Caterpillar (CAT) to show how to calculate Caterpillar’s asset turnover ratio. You can access Caterpillar’s net income statement and balance sheet statement from MSN Money website or you can use or product, Stock Financial Statements Download, to download and export Caterpillar’s net income and balance sheet statement into .CSV format. Followings are screenshots of both downloaded net income and balance sheet statements
 

 

 

From its income statement, Caterpillar has total revenue $65875M in 2012. From its balance sheet statement, Caterpillar has averaged total asset ($81446M+$89356M)/2 = $85401M in 2012
=> Caterpillar’s asset turnover ratio in 2012 = 65875/85401 = 0.77
 

Commentary

So far we have showed you how to calculate a company’s asset turnover ratio based on its net income and balance sheet statement. Take Caterpillar for example, its asset turnover ratio is 0.77 in 2012. That means for every $1 dollar worth of asset, Caterpillar will generate $0.77 dollar revenue. However, just like profit margin, asset turnover ratio itself doesn’t give us a big picture in terms of how the company does overall. It is possible for a company to have high asset turnover ratio yet its ROE is low. In the next article, we are going to introduce DuPont formula and show you the relationship among ROE, profit margin, financial leverage, and asset turnover ratio.

Calculate Gross Margin

In the article “Calculate Profit Margin” and “Calculate Operating Margin”, we showed how to calculate the profit margin and operating margin from the company’s net income statement. In this article, we are going to discuss the gross margin and show the equation and steps how to calculate operating margin from company’s net income statement. Also we are going to explain the difference between gross margin and markup. We are going to use net income statement from MSN Money website as an example to show the calculation
 

What is Gross Margin

Similar to Profit Margin and Operating Margin, Gross Margin is also one of the ratios to measure business’s profitability. The basic idea behind gross margin is to measure how profitable for every one unit of product the business sold before accounting other expenses. For example, if you own a coffee shop and for each coffee you sold for $3. In order to make a cup of coffee, you have to purchase coffee beans, coffee machines, paper cup… with total cost $0.3 in average. That means you earn the gross profit of $2.7 for each cup of coffee you sold. From the example about, we can see the gross profit calculation doesn’t include any expenses other than cost directly related to the product itself, such as rent for space, general administration…
=>Gross Margin = Gross Profit / Revenue
Where Gross Profit = Revenue – COGS (Cost of Goods Sold)
COGS (Cost of Goods Sold) is a general term to refer to the inventory cost. From the above example, COGS would mean the cost to purchase coffee beans, paper cup…
 

Difference between Gross Margin and Markup

Many people get confused with gross margin and markup. Basically these are two methods to describe the same thing, but with different purpose. The reason why some retailers prefer gross margin and some prefer markup is because gross margin is easier to calculate the profit from the sales revenue, while markup is easier to calculate sales price from the cost. We can always derive one another from following relation relations:
Markup = Revenue / COGS -1
=> Gross Margin = Markup/ (1+Markup).
=> Markup = Gross Margin / (1-Gross Margin)
 

Calculate Gross Margin from Net Income Statement

We are going to use income statement from company Caterpillar (CAT) to show how to calculate Caterpillar’s operating margin. You can access Caterpillar’s income statement here or you can use or product, Stock Financial Statements Download, to download and export Caterpillar’s income statement.

 


 
From its income statement, Caterpillar has total operating income $18820M and total revenue $65875M in 2012. Because Gross Margin = Gross Profit / Revenue
=> Caterpillar’s gross margin in 2012 = 18820/65875 = 28.57%
Notice that gross profit ($18820M) is derived by total revenue ($65875M) – cost of revenue ($47055M). Instead of calling it COGS (cost of goods sold), MSN Money website called it cost of revenue.
 

Commentary

In the article “Calculate Profit Margin” and “Calculate Operating Margin”, we calculated Caterpillar’s profit margin and operating margin in 2012 as 8.62% and 13.01% respectively. Caterpillar’s gross margin, 28.57%, is higher than its operating margin. It is no surprise that in general a company’s gross margin > operating margin > profit margin because gross profit calculation only includes production related costs and operation profit calculation includes production related costs and other operation costs, while net profit includes all costs

Calculate Operating Margin

In the article “Calculate Profit Margin”, we showed how to calculate the profit margin from business’s financial statement. In this article, we are going to discuss the operating margin and show the equation and steps how to calculate operating margin from company’s net income statement. We are going to use net income statement from MSN Money website as an example to show the calculation
 

What is Operating Margin

Similar to Profit Margin, Operating Margin is also one of the ratios to measure business’s profitability. The only difference is that instead of using net income, operating margin uses operating income to calculate the ratio
=>Operating Margin = Operating Income / Revenue
 

Difference between Operating Income and Net Income

As the name suggested, operating income is income generated solely from operating activity. Take the net income statement of Caterpillar Inc. (CAT) downloaded by Stock Financial Statements Download (SFSD) for example. It is obvious that
Operating Income = gross profit – operating expenses
Where operating expenses = Gross profit - selling general and administrative – research and development – special income/charges – interest income/expense
As for net income, it is derived from operating income minus nonoperation expense
=> Net income = operating income – nonoperation expense
= operating income – net interest income – other income – pretax income – provision for income tax – minority interest

 


 
 

Calculate Operating Margin from Financial Statement

We are going to use income statement from company Caterpillar (CAT) to show how to calculate Caterpillar’s operating margin. You can access Caterpillar’s income statement here or you can use or product, Stock Financial Statements Download, to download and export Caterpillar’s income statement.

Calculate Profit Margin

In the article “Calculate Financial Leverage”, we showed how to calculate the financial leverage from business’s financial statement and debt equity ratio. In this article, we are going to discuss the profit margin and show the equation and steps how to calculate profit margin from company’s financial statement, basically net income statement.

What is Profit Margin

Profit Margin is one of the ratios to measure business’s profitability. The basic idea behind this measurement is to see how efficient the business generates revenue based on cost accrued. If the business can generate more revenue based on less cost, it is more efficient, and hence has higher profit margin
=> Profit Margin = (Revenue – Cost)/Revenue
Because Revenue – Cost is simply Net Income
=>Profit Margin = Net Income / Revenue

Calculate Profit Margin from Financial Statement

We are going to use income statement from company Caterpillar (CAT) to show how to calculate Caterpillar’s profit margin. You can access Caterpillar’s income statement here or you can use or product, Stock Financial Statements Download, to download and export Caterpillar’s income statement.
Following is screenshot how it looks like using Stock Financial Statements Download to export it into local PC



From its income statement, Caterpillar has total revenue $65875M and net income $5681M in 2012. Because Profit Margin = Net Income / Revenue
=> Caterpillar’s profit margin in 2012 = 5681/65875 = 8.62%

Commentary

Profit Margin is used to measure business’s profitability. Higher profit margin generally indicates the company has higher profitability. However, from investors’ point of view, high profit margin doesn’t mean it will have high return on equity, which is the major ratio investors are looking for. It is possible that a company can have high profit margin yet its return on equity is low. Besides that, profit margin may vary among different industries. However, it is still a valuable indicator because investors can calculate the profit margin year by year based on the company’s historical financial statement for internal comparison

Stock Financial Statements Download V 1.0 Available

 
We are pleased to announce that the Stock Financial Statements Download(SFSD) version 1.0 is released! ! Stock Financial Statements Download is the software that can asynchronously download the business’s financial statement, such as net income statement, balance sheet statement, and cash flow statement, from MSN Money website. If you are an investor that make investment decision by company’s fundamental value, it is a must have tool. Stock Financial Statements Download can bulk download net income, balance sheet, and cash flow statement from a list of symbols defined by you. With raw data at hand, you can perform various ratio analysis among stocks and identify those that meet your investment requirement. The download period can be yearly or quarterly and up to most recent 5 periods.
 

Main Features

· Only one time purchase fee, no further subscription fee
· Batch downloads the symbol lists defined by you.
· Support the financial statements of stocks traded in US and Canadian markets
· Support data source from MSN Money (money.msn.com)
· Asynchronous download
· Financial statements supported net income, balance sheet, and cash flow statement
· Provide the flexibility to only download net income, balance sheet, or cash flow statement, or download all of them at once
· Provide the flexibility to download yearly or quarterly statement
· download period can be up to 5 periods back
You can download the lite version here with absolutely no cost

Stock Historical Data Download V2.01 Available Now

Stock Historical Data Download version 2.01 is released! If you have purchased this software before, you can upgrade to the latest version simply by login to your account and reinstall the file. This release is mainly to solve the administration issue.
Besides the minor bug fix and GUI improvement, the new feature for version 2.01 is that it provides the options for users to download only the most recent stock price and consolidate the downloaded data into one single file

New Features

Download only the most recent stock price data

It allows users who update their stock quotes every day to only download the most recent stock price

Generate Consolidated File

Now the users can choose to generate the consolidated file that merges all output data into one. For users that trade stocks with commercial trading tools that can accept merged data, it would be convenient
If you haven’t purchased the Stock Historical Data Download, you can download the trial version here.

Stock Daily Quotes Tracker V 1.0 Available To Monitor Your Portfolio

We are pleased to announce that the Stock Daily Quotes Tracker (SDQT) version 1.0 is released! ! Stock Daily Quotes Tracker is the software that can asynchronously retrieve daily stock quotes for you. If you manage your own portfolio, 401k, employee stock options, or participate in employee stock purchase plan, it is a tool that can help you manage your positions based on the price movement. It provides both real time and 15 minutes delay mode depends on your needs. If you intend to buy/sell the stock once its price moves down/up to certain level, simply set it up and let Stock Daily Quotes Tracker monitor for you. Once the stock is out of the predefined range, it will issue an alert. Besides that, Stock Daily Quotes Tracker also provides the embedded stock information window that retrieves a particular company’s summary, news, and chart from Yahoo Finance; moreover, technical indicators such as Bollinger Bands, Moving Average, Williams %R, Parabolic SAR, MACD, MFI, ROC, RSI, Slow Stochastic, and Fast Stochastic are available to help you make decision
 

Main Features

· Only one time purchase fee, no further subscription fee
· When alert is issued, corresponding symbols will be highlighted and the software window/icon will be blinking so you won’t miss the alert.
· Batch monitors the symbol lists defined by you.
· Support both real time and delay mode
· Support the updating of stocks, indices, and mutual funds publicly traded in US and Canadian markets
· Customize the update frequency and price range to trigger alert
· Embedded stock information window is provided to browse stock detail without leaving the software
· Enhanced chart setting to support various technical indicators
· Asynchronous download
You can download the lite version here with absolutely no cost.  Please let us know if you have any question or suggestion.

Compare Financial Leverage across Different Sector

In the previous article “Calculate Financial Leverage”, we explained what financial leverage is and its effect for the company’s return on equity. We also used Starbucks’ financial report as an example to show the way to calculate the financial leverage. Even though there is no guide line in terms of the amount of financial leverage the company should take, it seems that different business sectors would have different financial leverage due to the nature of the business. In this article, we are going to investigate this assumption and see if it is true.
 

Methodology

Sector Categorization

We categorize companies into nine sectors based on Yahoo Finance definition. The nine sectors are Basic Materials, Conglomerates, Consumer Goods, Financial, Healthcare, Industrial Goods, Services, Technology, and Utilities.
 

Company Selection

Among all tradable companies, we choose those that can be traded by options. The reason for that is because we would like to select companies that have certain liquidity. The company that can be traded by options means that they have certain liquidity. Currently there are 2253 companies that is option tradable.
 

Financial Leverage Calculation

For each selected company, we calculate its financial leverage simply by dividing its return on equity by its return on assets. After the financial leverage ratio for all companies are calculated, we choose the median of all companies belong to a certain sector to represent the financial leverage for that particular sector. Note the median is used instead of average to avoid the distortion due to long tail distribution
 

Result

Following table is the calculation result

Sector	Sample Number	Median FL
Technology	428	1.875
Basic Materials	322	1.935
Healthcare	204	1.98
Services	449	2
Industrial Goods	183	2.03
Consumer Goods	209	2.13
Conglomerates	9	2.37
Utilities	77	2.6
Financial	372	5.475

There are several observations we can make from this table:

1. Technology, Basic Materials, and Healthcare have financial leverage below 2
2. Services, Industrial Goods, Consumer Goods, and Utilities have financial leverage between 2 to 3
3. Comparing to the other eight sectors, Financial sector has much higher financial leverage (5.475)
Following is the financial leverage distribution comparison between Technology sector (lowest financial leverage) and financial sector (highest financial leverage)
 

Commentary

From the analysis above, there is a strong correlation between the amount of financial leverage companies take and the sector companies are at. It can be explained by the nature of business. In order for a technology company such as Apple to prosper, it requires the company to have sufficient cash all the time to support its research and development work. On the other hand, a company in financial sector such as Bank of America generates profit by using other people’s money (deposit). That explains why it has much higher financial leverage than other sectors

Calculate Financial Leverage

In the previous article “Debt Equity Ratio and Debt Ratio”, we discussed the relationships between debt-to-equity ratio and debt ratio and showed the formula to derive either one from the other. In this article, we are going to discuss the financial leverage and show the relationships between financial leverage and debt-to-equity ratio and use Starbucks as the example to show the calculation of financial leverage from its income and balance sheet statement

What is Financial Leverage

Financial leverage is a ratio to measure the multiply effect on the original return. Although there are many techniques to achieve this, the simplest way for a company to leverage its equity is by borrowing money. Let’s use Starbucks’ financial statement to explain how Starbucks multiplies its return by borrowing money. Here is the link to Starbucks’ income statement and balance sheet statement.

Calculate Financial Leverage from Financial Report

From its income statement, Starbucks has net income $1245.7M in 2011. Also from its balance sheet, Starbucks’ averaged Total Assets during 2010-2011 is $6873.15M ((7360.4+6385.9)/2). That gives Starbucks’ Return on Assets (ROA) 18.12% (1245.7/6873.15). However, from the investor’s point of view, the return is higher than 18.12%. When we purchase Starbucks’ stock, we become the stake holders of the company. That means we own a portion of the company’s equity depends on how many shares we have. In that sense, the actual return from the investor’s point of view should be calculated by using averaged Total Equity instead of averaged Total Assets.
From its balance sheet, Starbucks’ averaged Total Equity during 2010-2011 is $4029.8M ((4384.9+3674.7)/2). So the Return on Equity (ROE) for Starbucks is 30.91% ($1245.7M/$4029.8M), which is 1.71 x 18.12%. Because part of Starbucks’ assets is debts, it is able to generate higher return and we call the ratio 1.71 financial leverage

Calculate Financial Leverage from Debt Equity Ratio

From the above example, we can see that financial leverage = Return on Equity / Return on Assets, while Return on Equity = Net income / Averaged Total Equity, and Return on Assets = Net Income / Averaged Total Assets
=> Financial Leverage= Averaged Total Assets / Averaged Total Equity
= (Averaged Total Liabilities + Averaged Total Equity) / Averaged Total Equity
=> Financial Leverage = Debt-to-Equity Ratio + 1
Take Starbucks for example, it has averaged total liabilities $2843.35M ((2975.5+2711.2)/2) and averaged total equity $4029.8M. That gives us debt-to-equity ratio = 0.71. Because financial leverage ratio is also = Debt-to-Equity Ratio + 1, we get the same financial ratio 1.71

Commentary

The formula we derived above is convenient because Debt-to-Equity ratio is a common ratio that we can get. Simply add 1 to the debt-to-equity ratio then we can get the financial leverage ratio

Debt Equity Ratio and Debt Ratio

In the previous article, we briefly talked about debt equity ratio and mentioned that debt equity ratio is related to the company’s financial leverage. However, many investors confuse debt equity ratio and debt ratio. Actually debt equity ratio is not the same as debt ratio but either one can be derived by the other one. In this article, we are going to explain the relationship between debt equity ratio and debt ratio

Debt Equity Ratio

Debt equity ratio is calculated by dividing a company’s total liabilities by stockholder’s equity:
Debt Equity Ratio = Total Liabilities / Total Equity (Eq. 1)
It gives investors an idea how a company has been aggressively borrowing money to grow its business. High debt equity ratio indicates that the company is aggressively expanding its business by using a large portion of capital that is not its own. If the incremental profit generated by expanding is higher than the cost of interests, the company is generating more profit compared to the scenario had company not borrowed the money. On the other hand, the company could generate larger than expected loss if the result doesn’t go well.

Debt Ratio

Similar to debt equity ratio, debt ratio is calculated by dividing a company’s total liabilities by its total assets, which is a company’s total liabilities plus total stockholder’s equity
Debt Ratio = Total Liabilities / Total Assets (Eq. 2)
From Eq. 1 and Eq. 2, we can derive:
Debt Ratio = Debt Equity Ratio / (1+Debt Equity Ratio) (Eq. 3)
Note from Eq. 3 we can see that Debt ratio always greater than or equal to 1 since debt equity ratio can’t be less than 0
Based on the equation above, we can easily calculate the debt ratio based on debt equity ratio.

Application

The concept of debt ratio can not only apply to individual company but also can apply to industry or sector level. If we use Stock Market Browser to investigate the debt equity ratio of 9 sectors, we see the sector Industrial Goods has the highest debt to equity ratio while Basic Material has the lowest debt to equity ratio.
 


 

We can apply Eq. 3 to calculate these two sectors’ debt ratio:
For sector industrial goods, its debt ratio = = 65.64%
For sector Basic Materials, its debt ratio = = 27.54%

Commentary

Although debt equity ratio is used more frequently, both debt equity ratio and debt ratio give investors the same information. However, debt equity ratio is more convenient when calculating a company’s financial leverage, which we will discuss in the next article

Knowledge Base

Version Release

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Tips and How To

Stock Historical Data Download

· Generate MetaStock ASCII Format by Stock Historical Data Download
· ASCII to MetaStock Conversion Utility

Stock Fundamental Data Download

· Introduction to Dividend Yield
· Ex-Dividend Date and Dividend Pay Date
· PE and PEG Ratio

Stock Market Browser

· Debt to Equity Ratio in Stock Market Browser

Stock Intraday Quotes Download

· Generate Stock Intraday Data for Excel

Investment Knowledge

· Market Risk Premium 101
· Measuring the Risk - Volatility
· Compare Profit Margin across Different Sectors
· Comparing the Volatility across Different Assets
· Debt Equity Ratio and Debt Ratio
· Dupont Equation and Its Implication
. Calculate Financial Leverage
. Calculate Asset Turnover Ratio
. Calculate Operating Margin
. Calculate Profit Margin
. Calculate Gross Margin
. Compare Financial Leverage Across Different Sector
· Introduction to Dividend Yield
· Ex-Dividend Date and Dividend Pay Date
· PE and PEG Ratio

Stock Market Browser V 1.18 Available Now

We are pleased to announce that the Stock Market Browser (SMB) version 1.18 is released! ! If you have purchased this software before, you can upgrade to the latest version with no charge at all
 

What’s New in Version 1.23

“Zoom in” option in Popup Menu

The Zoom in option in Popup Menu allows you to access all industries available from the sector you choose or allows you to access all companies available from the industry you choose. One of the wildly used situations would be to access all companies available from the industry you are interested in from “All Industries”. Suppose you are interested in getting a list of companies in “Business Equipment” that matches your screening criteria, you can simply highlight “Business Equipment”, right click mouse button, and then choose option “Zoom in”, just like sample screenshot below.



Following is the sample screenshot after choosing “Zoom in” Option:



The table will show the list of companies in “Business Equipment” industries. Also the Browser Window will highlight the industry you choose to give you an idea which sector this industry belong to (see red box above)

Add Online Resources Tab in Information Window

The Online Resources tab in information window allows you to access popular website to get more information about a particular company that you are interested in. Following is a sample screenshot



If you are interested in Xerox Corp. (XRX) in Business Equipment industry, you can double click XRX, Stock Market Brower will provide you basic company information such as its profile, news, and chart. If you want to get to know more about Xerox, simply choose Online Resources table and choose the website you prefer to have access. Currently you can choose the website among Yahoo Finance, Google Finance, MSN Money, and Stock Market Watch.
If you haven’t purchased the Stock Market Browser yet, you can download the lite version here with absolutely no cost

Debt to Equity Ratio in Stock Market Browser

Stock Market Browser is a tool that can give you a quick snapshot of the total stock market from sector down to individual stock. One of the financial ratios it provides to you is Debt to Equity ratio. However, the meaning of Debt to Equity ratio in Stock Market Browser is different from the traditional meaning of Debt to Equity ratio. In this article, we are going to use Caterpillar’s most recent balance sheet provided by Yahoo Finance to show the calculation of Debt to Equity ratio in Stock Market Browser and compare the number from traditional Debt to Equity ratio. Following is Caterpillar’s quarterly balance sheet from Yahoo Finance:

Traditional Meaning of Debt to Equity Ratio

Normally, Debt to Equity Ratio is defined a company’s total liabilities divided by a company’s averaged shareholders’ equity

From Caterpillar’s balance sheet of most recent quarter, it has total liabilities 68.09B and averaged total shareholders’ equity (12.883B + 14.162B)/2 = 13.52B. Based on the formula above, its debt to equity ratio would be 68.09 / 13.52 = 5.04
However, this number is different from the number provided by Stock Market Browser:



You can find out Caterpillar (CAT) under sector Conglomerate and industry Conglomerate.
As of 04/02/2012, Debt to Equity ratio provided by Stock Market Browser is 258

Derive Debt to Equity Ratio in Stock Market Browser

First of all, the unit of this ratio is 100%. That means 258 is actually 258%. So how Stock Market Browser derives 2.58?
Instead of using total liability to represent total debt, Stock Market Browser only use item “Long Term Debt” and “Short/Current Long Term Debt” to represent total debt. In other words, it only considers total long term debt as real debt.
Based on Caterpillar’s balance sheet of most recent quarter, it has short/current long term debt 9.648B and long term debt 24.944B. The Debt to Equity Ratio would be (9.648+24.944)/13.52 = 2.58, which is 258%
 

Conclusion

In the traditional definition, the company’s total liabilities is used to represent the total debt, but Stock Market Browser only uses total long term debt, which is the portion of liabilities that accrues the most of interest. Because it only uses the portion of liabilities that accrues the most of interest, the ratio can give investors a better measurement in terms of financial leverage and risk.

Generate Stock Intraday Data for Excel

Not everyone knows that Microsoft Excel has the ability to draw stock chart. If you don’t have professional charting tool, Microsoft Excel stock chart is a simple but useful tool to conduct initial analysis. For example, if you are interested in plotting Coca-Cola (KO) daily chart with 1minute interval, following are the steps to generate stock intraday chart by using data output from Stock Intraday Quotes Download

Step 1: Generate Data Output With Appropriate Settings

Microsoft Excel stock chart requires the data format to be Time-Volume-Open-High-Low-Close, which is different from traditional format, Time-Open-High-Low-Close-Volume. But no problem, Stock Intraday Quotes Download gives you the flexibility to choose the order of data field. Follow is the sample screenshot for the setting in “Customize the data field” window:



Following is the sample screenshot for the setting window:



Make sure the file extension is “csv” so that when you double click the output, it will be automatically opened by Excel. Also make sure the Add Header box is checked. Because we are interested in generating daily chart with interval 1 minute, choose Range to be 1 day and Interval to be 1 min. As for data source, it can be either Google Finance or Yahoo Finance, depends on your preference.
After that, simply add the symbol KO in the table and hit update.

Step2: Load generated data into Excel

Following is a sample screenshot after you open the generated data by Excel



If you are using Microsoft Excel 2010, you can find stock chart type in “Insert”->”Other Charts”->”stock”

Step 3: Generate the Chart

Following is the KO daily chart generated after selecting the column B – G and choose the right most stock chart type



That’s it. You can also use Excel to calculate some indicators such as moving average, RSI, and MACD, and plot them. It’s a tool you can consider and it is free if you already have Excel

Stock Intraday Quotes Download 1.0 Available Now

Stock Intraday Quotes Download 1.0 (SIQD) version 1.00 is released! It can download the stock intraday prices for you with no monthly subscription fee at all. With the support of various data format such as MetaStock, you are able to use SIQD to download the intraday stock data, convert it to MetaStock format, and load it into your charting tool. Tired of manually launching the software, opening the symbol list, hitting the update button every day? Don’t worry, Stock Intraday Quotes Download supports console mode that makes fully automation possible.

Main Features

· Only one time purchase fee, no monthly subscription fee
· Batch downloads the symbol lists defined by you. There is no limitation of the number of symbols
· Support data source from Yahoo Finance and Google Finance
· Asynchronous download
· GUI or console-only versions
· Define your own data format to download
· Support MetaStock ASCII 8 column format
· Support various data range (1 – 15 days) and interval (1 – 60 minutes)
· Customize the data file name with postfix option
· Fully automation through command mode

You can access the complete documentation here. Also we provide the trial version with absolutely no cost to you. Try it now and tell us what you think. We would be more than happy to get any feedback or suggestion from you!

ASCII to MetaStock Conversion Utility

 
Free end of day ASCII to MetaStock conversion utility is available now! It allows you to easily convert data generated from Stock Historical Data Download to MetaStock/Computrac format without any charges. Following is a simple instruction:

Step 1: Download the software

You can download the software from eoddata website here. You have to be a registered member to be able to download it. It is free to become a registered member

Step2: Generate stock end-of-day data

You can easily generate stock end-of-day data by using Stock Historical Data Download with appropriate setting:
1. For File Name Setup, the file extension has to be set as “txt” and the postfix has be set as “_date”. For example, if your end-of-day data is generated in 2012 March 24, type “_20120324” here
2. For Format Setup, the Date Format has to be set as “YYYYMMDD” and the Separator has to be set to none
Following is a sample screenshot of the necessary settings.



Following is the sample screenshot for MetaStock column 8 setting nn the “Customize the Data Field”

Step 3: Convert EOD data into MetaStock Format

After generating EOD data, we are ready to convert it into MetaStock format. First, launch the conversion utility. Following is a sample screenshot that you will see after launching the conversion utility:



The setting is very straightforward. Simply choose your source directory and destination directory, and then hit the “Convert” button.