Ratio analysis tricks and more

[krokodilizm]

I would like to summon all the mathematicians and wizards (and magicians) here to share mathematical tricks and shortcuts that can be used to quickly analyze questions that usually ask whether X will be higher, lower or unchanged. I am thinking of three tricks at the moment:
1. If you are told that D/E=0.25, then to quickly find the % debt and % equity, simply add 1 to this ratio and reciprocate, i.e. E= 1/1.25=80% and D=20% so D/E=20/80=0.25. Very helpful for calculating WACC quickly.
2. When a ratio A/B is less than one, deducting an amount X from both numerator and denominator will reduce the ratio even further. For example, 3/10 > 2/9. This can be applied for instance to Return/Equity, which is normally less than one.
3. When a ratio A/B is greater than one, similarly deducting an amount X from both numerator and denominator will increase the ratio. For example, 10/3 < 9/2. This idea can be useful for interest coverage, asset turnover etc.
Thanks.

 

[S2000magician]

krokodilizm wrote:2. When a ratio A/B is less than zero one, deducting an amount X from both numerator and denominator will reduce the ratio even further. For example, 3/10 > 2/9. This can be applied for instance to Return/Equity, which is normally less than zero.
3. When a ratio A/B is greater than zero one, similarly deducting an amount X from both numerator and denominator will increase the ratio. For example, 10/3 < 9/2. This idea can be useful for interest coverage, asset turnover etc.

Fixed those for you.

 

[Harrogath]

krokodilizm wrote:
1. If you are told that D/E=0.25, then to quickly find the % debt and % equity, simply add 1 to this ratio and reciprocate, i.e. E= 1/1.25=80% and D=20% so D/E=20/80=0.25. Very helpful for calculating WACC quickly.

What I do here is the following. If D/E = 0.25, then Debt is 4 times lower than equity, so total assets sum 4 + 1 = 5.
4/5 = 80% (equity) and 1/5 = 20% (debt)
However, not much easy for a D/E = 0.378 for example. If this is the case I do the following:
1 / 0.378 = 2.65
total assets = 1 + 2.65 = 3.65
Equity % = 2.65 / 3.65
Debt % = 1 / 3.65

 

[krokodilizm]

S2000magician wrote:

krokodilizm wrote:2. When a ratio A/B is less than zero one, deducting an amount X from both numerator and denominator will reduce the ratio even further. For example, 3/10 > 2/9. This can be applied for instance to Return/Equity, which is normally less than zero.
3. When a ratio A/B is greater than zero one, similarly deducting an amount X from both numerator and denominator will increase the ratio. For example, 10/3 < 9/2. This idea can be useful for interest coverage, asset turnover etc.

Fixed those for you.

Thanks! Corrected.

 

[tau281290]

Harrogath wrote:
However, not much easy for a D/E = 0.378 for example. If this is the case I do the following:
1 / 0.378 = 2.65
total assets = 1 + 2.65 = 3.65
Equity % = 2.65 / 3.65
Debt % = 1 / 3.65

Well in that case I just do D/E = 378/1000 Total Assets = 1378 Seems more intuitive to me this way.

 

[FinanceAspire]

Harrogath wrote:

krokodilizm wrote:
1. If you are told that D/E=0.25, then to quickly find the % debt and % equity, simply add 1 to this ratio and reciprocate, i.e. E= 1/1.25=80% and D=20% so D/E=20/80=0.25. Very helpful for calculating WACC quickly.

What I do here is the following. If D/E = 0.25, then Debt is 4 times lower than equity, so total assets sum 4 + 1 = 5.
4/5 = 80% (equity) and 1/5 = 20% (debt)
However, not much easy for a D/E = 0.378 for example. If this is the case I do the following:
1 / 0.378 = 2.65
total assets = 1 + 2.65 = 3.65
Equity % = 2.65 / 3.65
Debt % = 1 / 3.65

I don’t think that’s right. Your answer states that D/E is 1/2.65 or .3774.
If the original D/E is 0.378 as you used in your example, you would still do the same steps 1/(.378+1) = .7257= E: 1-.7257 = .2743.
Did I miss something here?