Key Financial Ratios for Retail Sector Analysis
- Liquidity, profitability, efficiency, leverage, and valuation ratios provide financial insights into a retailer’s performance.
Liquidity Ratios
- Liquidity ratios evaluate a retail company’s ability to meet short-term obligations.
Current ratio - indicates a retailer’s current assets capacity to cover short-term liabilities.
Quick ratio or Acid-test ratio - excludes inventory from current assets, focusing on cash, marketable securities, and receivables to determine the retailer’s ability to cover short-term liabilities. This is crucial in retail, where inventory can be less liquid.
Profitability Ratios
- Profitability ratios assess a retailer’s ability to generate earnings relative to sales, assets, and equity.
Gross profit margin - reveals how well a retailer manages production or purchasing costs.
Operating profit margin - indicates operational cost management efficiency.
Return on Assets - measures how effectively assets generate profit. Critical in asset-heavy retail operations
Return on Equity - evaluates the return on shareholders’ investments, critical in asset-heavy retail operations.
Efficiency Ratios
- Efficiency ratios examine how well a retail company utilizes resources to generate revenue.
Inventory turnover ratio - measures how often inventory is sold and replaced.
Accounts receivable turnover ratio - evaluates how efficiently a retailer collects revenue from credit sales.
Asset turnover ratio - highlights how well a retailer uses assets to generate sales.
Leverage Ratios
- Leverage ratios evaluate how retail companies manage debt to finance operations and growth.
Debt-to-equity ratio - measures the proportion of debt relative to equity to assess financial risk.
Interest coverage ratio - assesses a retailer’s ability to meet interest obligations using operating income.
Valuation Ratios
- Valuation ratios help investors assess the market value of retail stocks.
Price-to-earnings ratio - reflects investor expectations for future growth.
Price-to-sales ratio - evaluates a stock’s price relative to revenue.
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