How to pick stock (part 6)

Financial terms

There are a lot of financial term which I would like to explain it in the business way.

Current ratio

Current ratio = current asset / current liabilities. This is the measurement to check whether the current working capital can support the current situation. The higher the ratio the better the company. This is because with higher ratio, the lower posibility the company goes bankruptcy.

Net Profit ratio

Net profit margin ratio = net profit / revenue. This is a measurement to check whether does the company has the bargain power over its supplier and customer. Take for example, bat has very high profit margin is because of its business model in Malaysia. The higher the better.

Asset turnover

Asset turnover = revenue / asset. In other word, it tells us how fast or how effecient of the revenue been generated from the asset. The more higher the better.

Equity multiplier

Equity multiplier = asset / equity. This is leverage ratio. It is good if the current cash flow can support its growth, otherwis everyone will fall down again.