Gleim Cma Su 2: Ratio Analysis

Front 1

What is liquidity?

Back 1

A firm's ability to pay its current obligations. The ease with with assets can be converted to cash.

Front 2

Net Working Capital Ratio

Back 2

Current Assets - Current Liabilities

Front 3

Current Ratio

Back 3

Current Assets ÷ Current Liabilities

Front 4

Low current ratio indicates?

Back 4

Solvency problem; inability to pay current obligations

Front 5

A low receivable turnover and low inventory turnover indicates?

Back 5

A need for a higher current ratio because they are not being converted to cash quick enough.

Front 6

Quick (Acid-Test) Ratio

Back 6

(Cash + Marketable Securities + Net Receivables) ÷ Current Liabilities

Front 7

What does Quick (Acid-Test) Ratio measure?

Back 7

Firms ability to easily pay short-term debts. Removes inventory valuation issues.

Front 8

Cash Ratio

Back 8

(Cash + Marketable Securities) ÷ Current Liabilities

Front 9

Cash Flow Ratio

Back 9

Cash Flow from Operations ÷ Current Liabilities

Front 10

Net Working Capital Ratio

Back 10

(Current Assets - Current Liabilities) ÷ Total Assets

Front 11

Accounts Receivable Turnover

Back 11

Net Credit Sales ÷ Average A/R

Front 12

What does Accounts Receivable Turnover measure?

Back 12

Efficient of A/R collection.

Front 13

Impact of Sales as numerator?

Back 13

Higher sales without change in A/R means a higher turnover.

Front 14

Impact of A/R as denominator?

Back 14

Lower A/R will result in a higher turnover.

Front 15

Days' Sales Outstanding in A/R

Back 15

Days in Year ÷ A/R Turnover

Note: Days can be 365. 360, or 300 (number of business days)

Front 16

Impact of A/R Turnover as denominator?

Back 16

A high turnover will decrease DSO.

Front 17

Inventory Turnover

Back 17

Cost of Goods Sold ÷ Average Inventory

Front 18

What does a high Inventory Turnover mean?

Back 18

Excess levels of inventory not being carried by company.

Front 19

Impact of COGS as numerator?

Back 19

Higher sales without a change in inventory will cause a better turnover.

Front 20

Impact of inventory as denominator?

Back 20

Low inventory with lease to a higher turnover.

Front 21

Days' Sales in Inventory

Back 21

Days in Year ÷ Inventory Turnover

Front 22

Accounts Payable Turnover

Back 22

Purchases ÷ Average A/P

Front 23

Days' Purchases in A/P

Back 23

Days in Year ÷ A/P Turnover

Front 24

Operating Cycle

Back 24

Days' Sales Outstanding in A/R + Days' Sales in Inventory

Front 25

What does Operating Cycle measure?

Back 25

Amount of time that passes between the acquisition of inventory and the collection of cash on the sale of that inventory.

Front 26

Cash Cycle

Back 26

Operating Cycle - Days' Purchases in Payable.

Front 27

What does Cash Cycle measure?

Back 27

The portion of the operating cycle when cash is tied up in Inventory and A/R.

Front 28

Fixed Asset Turnover

Back 28

Net Sales ÷ Average PP&E

Front 29

What does Fixed Asset Turnover measure?

Back 29

How efficiently the company is deploying its investment in PP&E to generate revenue.

Front 30

Total Asset Turnover

Back 30

Net Sales ÷ Average Total Assets

Front 31

What does the Total Asset Turnover measure?

Back 31

How efficiently the company is deploying the totality of resources to generate revenue.

Front 32

What is Solvency?

Back 32

A firm's ability to pay non-current obligations as they come due.

Front 33

What are the key ingredients of solvency?

Back 33

The company's capital structure and degree of leverage.

Front 34

What is capital structure?

Back 34

Its sources of financing (both internal and external).

Front 35

What is the impact of a higher percentage of debt capital?

Back 35

Firm will be considered riskier and a higher rate of return will be expected by investors.

Front 36

Total Debt to Total Capital Ratio

Back 36

Total Debt (Liabilities) ÷ Total Capital (Liabilities + Equity)

Front 37

A low Debt to Capital Ratio means?

Back 37

More of the firm's capital is in the form of equity. Low is preferred by creditors.

Front 38

Debt to Equity Ratio

Back 38

Total Debt (Liabilities) ÷ Total Stockholders' Equity

Front 39

Long-Term Debt to Equity Ratio

Back 39

Long-Term Debt (Liabilities) ÷ Total Stockholders' Equity

Front 40

Debt to Total Assets Ratio

Back 40

Total Liabilities ÷ Total Assets

Note: Also called debt ratio. Numerically identical to the Debt to Total Assets Ratio.

Front 41

What is Earnings Coverage?

Back 41

Measure of a company's ability to satisfy long-term debts and remain solvent.

Front 42

Time Interest Earned Ratio

Back 42

EBIT ÷ Interest Expense

Note: Interest Expense should include capitalized interest.

Front 43

Earnings to Fixed Charges Ratio

Back 43

(EBIT + Interest portion of Operating Leases) ÷ (Interest Expense + Interest portion of Operating Leases + Dividends on Preferred Stock)

Note: Also called Fixed Charge Coverage Ratio.

Front 44

Cash Flow to Fixed Charges Ratio

Back 44

Pre-Tax Operating Cash Flow ÷ (Interest Expense + Interest portion of Operating Leases + Dividends on Preferred Stock)

Front 45

What are the two types of leverage?

Back 45

Operating Leverage and Financial Leverage

Front 46

Operating Leverage?

Back 46

Use of a high level of plant and machinery in the production process from depreciation, property taxes, etc.

Front 47

Financial Leverage?

Back 47

Use of a high level of debt in the firm's financing structure from amounts paid for interest.

Front 48

Degree of Operating Leverage (two versions)

Back 48

Single-Period Version:
Contribution Margin ÷ EBIT

Percentage-Change Version:
% Change in EBIT ÷ % Change in Sales

Front 49

Risk from higher operating leverage?

Back 49

Grater because fixed costs must be covered regardless of the level of sales.

Front 50

Degree of Financial Leverage (two versions)

Back 50

Single-Period Version:
EBIT ÷ EBT

Percentage-Change Version:
% Change in Net Income ÷ % Change in EBIT

Front 51

Risk from higher financial leverage?

Back 51

Greater because debt must be serviced regardless of the level of earnings.