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31 Cards in this Set
- Front
- Back
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What are the five ratios categories? |
1.Liquidity 2.Asset management ratios 3.Debt management ratios 4.Profitability ratios 5. Market value ratios |
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Current ratio |
current assets/current liabilities |
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Quick (Acid-Test) ratio |
(Current assets-Inventories)/Current Liabilities Firms ability to pay off short-term obligations without relying on the sale of inventories. |
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Liquidity Ratios |
Ratios that show the relationship of a firms cash and other current assets to its current liabilities |
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current ratio |
The ratio is calculated by dividing current assets by current liabilities. It indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future. |
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Quick (Acid Test) Ratio |
This ratio is calculated by deducting inventories from current assets and then dividing the remainder by current liabilities. |
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Asset Management Ratios |
A set of ratios that measure how effectively a firm is managing its assets. |
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Inventory Turnover ratio |
sales/Inventories -lower your ratio means your holding to much inventory -Higher ratio means you buy and sell your inventory more times per year....usually meaning more profit |
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Days Sales Outstanding (DSO) |
DSO= Receivables/(average sales per day) or simplified DSO=Receivables/(annual sales/365)
Indicates the average length of time the firm must wait after making a sale before it receives cash. You want a smaller number means you collect faster |
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Fixed Assets Turnover Ratio |
Sales /net fixed assets The ratio of sales to net fixed assets |
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Total Assets Turnover Ratio |
Sales /Total Assets |
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Return on Equity |
Net Income/Common Equity |
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What does un-Leveraged mean? |
it means you finance through Equity and not debt |
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What does leveraged mean? |
A business finances through debt |
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Difference in profit with leveraged and unleveraged? |
In a good or expected economy a company financing through debt will have a higher ROE. In a bad economy a leveraged company will have a negative ROE making it hard to survive longer recessions. |
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Debt management ratios |
a set of ratios that measure how effectively a firm manages its debt. |
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Total debt to Total Captial |
Total Debt/Total Capital OR more simply Total debt/(total debt+total equity) measures the percentage of the firms capital provided by debt holders. Total debt excludes accounts payable and accruals |
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Times Interest Earned Ratio |
The ratio of earnings before interest and taxes (EBIT) to interest charges; a measure of the firms ability to meet its annual interest payments Times Interest Earned Ratio= EBIT/Interest Charges Measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs. The higher the number the better meaning it takes a larger decline before you cant cover interest payments |
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Profitability Ratios |
A group of ratios that show the combined effects of liquidity, asset management, and debt on operating results. |
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Operating Margin |
Operating Margin= EBIT/Sales This ratio measures operating income, or EBIT, per dollar of sales. Is a measure to see if operating costs are too high or not |
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Profit Margin |
Profit Margin= Net Income/Sales This ratio measures net income per dollar of sales and is calculated by dividing net income by sales. |
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Return on Total Assets ROA |
ROA= Net Income/total assets You want a higher return on assets If you finance with a lot of debt it reduces your net income because interest is deducted before net income this can lead to lower profitability ratios. |
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Return on Common Equity |
ROE=Net Income/Common Equity Represents the rate of return on common stockholders investment |
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Return on Invested Capital |
ROIC= EBIT(1-T)/Total invested capital EBIT(1-T)/(DEBT+EQUITY) measures the amount of funds available to pay both stockholders and debt holders. |
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Market Value Ratios |
Ratios that relate the firms stock price to its earnings and book value per share |
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Price/Earnings (P/E)Ratio |
shows how much investors are willing to pay per dollar of reported profits Price:Earnings= Price per share/earnings per share |
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Market/Book ratio |
market book ratio= market price per share/book value per share Book value per share is found by dividing common equity by shares outstanding measure of how much a investor is willingly to pay for a share of stock over its book value |
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Dupont Equation |
A formula that shows that the rate of return on equity can be found as the product of profit margin, total assets turnover, and the equity multiplier. It shows the relationships among asset management, debt management, and profitability ratios. |
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3 ways to asses performance using financial ratios |
1) industry average 2) Bench-marking 3) Trend analysis |
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Bench-marking |
The process of comparing a particular company with a subset of top competitors in its industry |
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Trend Analysis |
An analysis of a firm's financial ratios over time; used to estimate the likelihood of improvement or deterioration in its financial condition. |
