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40 Cards in this Set

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Current Ratio
Current assets / Current Liabilities

Higher current ratio means a company will be able to pay its short term bills.
Quick ratio
(cash + marketable securities + receivables) / current liabilities

More stringent measure of liquidity because it does not include inventories and other assets that may not be that liquid.
What are marketable securities?
Very liquid securities
Cash Ratio
(Cash + marketable securities) / Current liabilities

Most conservative liquid measure
Receivables Turnover
net annual sales / average receivables

Measure of accounts receivables liquidity. Best if ratio is close to industry norm.
average receivables collection period
365 / receivables turnover

How long does it take for a company's customers to pay its bills?
inventory turnover
cost of goods sold / average inventory

measure efficiency of a firm w/ respect to its processing and inventory management
average inventory processing period
365 / inventory turnover

Low number may indicate that there is not enough stock on hand.
payables turnover ratio
cost of goods sold / average trade payables
Payables payament period
365 / payable turnover ratio
Cash conversion cycle
average receivables collection period + average inventory processing period - payables payment period

high cash conversion cycles are considered undesirable. Implies that the company has an excessive amount of capital investment in the sales process
What are the operating profitability ratios?
include the gross profit margin, operating profit margin, net profit margin, common size income statement, return on total capital, and return on toatl equity
total asset turnover
net sales / average total net assets

desirable for it to be close to the industry norm.
Too high may imply that the cmopany has too much capital tied up in its asset base. Perhaps the firm has too few assets for potential sales or that the asset base is outdated.
fixed asset turnover
measures the utilization of fixed assets:

net sales / average net fixed assets
equity turnover
measure of the employment of owner's capital

equity turnover = net sales / average equity

Equity capital includes all preferred and common stock, paid in capital, and treatined earnings. Analysts need to evaluate capital structure of the company because a company can increase this ratio without increasing profitability simply by usingmore debt financing.
What do operating profitability ratios look at?
How good management is at turning their efforts into profits. Compare the top of the income statement (sales) to profits)
What is gross profit?
Net Sales - COGS
Operating profits
Earnings before interest and taxes = EBIT
Net income
Earning after taxes but before dividends
Total capital
long term debt + short term debt + common and referred equity

= total assets
gross profit margin
gross profit / net sales
(shouldn't be too low)
Operating Profit margin
EBIT / net sales

shouldn't be too low
net profit margin
net income / sales

shouln't be too low
net income should be based on continuing operations
return on total capital
(net income + interest expense) / average total capital

this ratio shouldn't be too low
interest expense should be gross interest expense
return on total equity
net income / average total equity
Return on owner's equity
(net income - preferred dividend) / average common equity
=
net income available to common / average common equit
business risk
st. deviation of EBIT / mean EBIT

use between five and ten years of data. Shouldn't be too high
sales variability
std. deviation of sales / mean sales
operating levarage
mean [ absolute value (% change OE / % change sales)]

measures how much of the company's productin costs are fixed (as opposed to variable).
debt to equity ratio
total long term debt /
total equity

total long term debt = long term liabilities + deferred taxes + present value of lease obligations
long term debt to total long term capital
total long term debt / total long term capital

total long term capital = all long term debt plus preferred stock and equity. Increases and decreases in this ratio suggest a greater or lesser reliance on debt as a source of financing.
total debt ratio
(current liabilities + total long term debt) / (total debt + total equity)
total interest bearing debt to total funded capital
total interest bearing debt / (total capital - non interest bearing liabilities)

use this if only interest bearing debt and equity are considered to bel ong term capital
interest coverage
earnings before interest and taxes / interest expense

lower ratio implies that the firm will have difficulty meeting its debt payments.
fixed financial cost ratio
EBIT + ELIE / (gross interest expense + ELIE)

ELIE = estimated lease interest expense

recognizes that firms that use lease facilities are in essence borrowing the capital to utilize those facilities.

The higher the coverage ratio, the the better the firm is better able to manage its current debt levels or that the firm has unused borrowing capacity
cash flow to long term debt
CFO / (Book value of long term debt + present value of perationg leases)

determines the ability of a company to meet its debt obligations
cash flow ot total debt ratio
cfo / (total long term debt + current interest bearing liabilities)

Lower ratio means that the firm will have difficulty meeting its debt payment
sustainable growth rate
g = retention rate * ROE
reterntion rate
1 - (dividends declared / operating income after taxes)
divident payout ratio
dividends declared / operating income after taxes