External Finance

External Finance Ratio = (Gross change in total assets for the year - net cash generated from operations) / Total assets at the end of the year.

If the ratio is positive (>0) it means that the company was not able to finance its assets growth from cash generated by its business whereas if the ratio was negative (<0) it means that the company was able to more than finance its assets growth through the cash the business generated.

This idea for this ratio came from the excellent book by Richard Tortoriello called Quantitative Strategies for Achieving Alpha: The Standard and Poor's Approach to Testing Your Investment Choices

 

Read more about the External Finance Ratio (EFR) here: Use this simple quality ratio to improve your investment returns