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61 Cards in this Set
- Front
- Back
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Ratio Analysis (defined) |
forming quantitative relationship between various elements of a firm's financial and other info |
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what is the purpose of Ratio Analysis? |
-enable comparisons over time for a firm or across firms
-help identify operating and financial strengths and weaknesses |
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When using IS and BS value, what value is used for each? |
Only 1 income statement for the year
Average the beginning and ending values on BS |
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4 major types/purposes of financial ratios |
1. liquidity/solvency
2. operational activity
3. profitability
4. equity/investment leverage |
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Liquidity (Solvency) defined |
measures the ability of a firm to pay its debts
-used in managing Working Capital |
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Working Capital (formula) |
WC = current assets - current liabilities |
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Working Capital Ratio (Current Ratio) defined & formula |
measures "number of times" current assets can cover current liabilities
WCR = Current Assets / Current Liabilities
-used to measure ability to pay current liabilities |
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Acid Test Ratio (Quick Ratio) defined |
measures the relationship between highly liquid assets and current liabilities in terms of the "number of times" that cash and assets can be converted quickly to cover current liabilities |
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Acid Test Ratio (formula) |
Acid Test Ratio = (cash + net receivables + marketable securities) / current liabilities
-CL includes AP and ST notes payable |
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Defensive-Interval Ratio (defined) |
measures relationship between highly liquid assets and the average daily use of cash; number of days that cash and assets can be quickly converted to cash to support operating costs |
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Defensive-Interval Ratio (formula) |
= (cash + net receivables + marketable securities)/(average daily cash expenditures) |
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Average Collection Period (defined and formula) |
measures average number of days to convert AR to cash
= (days in year * average AR) / (credit sale for period) |
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Times Interest Earned Ratio (defined & formula) |
measures the ability of current earnings to cover interest payments for a period
= (NI + interest expense + income taxes paid) / interest expense
**adding back interest and tax expense to income |
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Times Preferred dividends earned ratio (defined & formula) |
measures ability to current earnings to cover preferred dividends for a period
= NI / Annual Preferred Dividend Obligation |
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What do Equity/Investment Leverage Ratios measure? |
relative sources of equity and equity value |
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Debt to Equity Ratio (formula) |
Total Liabilities / Total Shareholders' Equity
where...
Total Shareholders' Equity = capital stock - retained earnings
and, Total Liabilities = assets - Total Equity |
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Owners' Equity Ratio (defined & formula) |
proportion of assets provided by shareholders
Shareholders' Equity / Total Assets |
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Debt Ratio (defined & formula) |
proportion of assets provided by creditors; extent of leverage in funding the entity
Total Liabilities / Total Assets |
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Book Value per Common Stock (formula) |
Common Shareholder's Equity / Number of Outstanding Common Shares |
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Book Value per Preferred Share (formula) |
Preferred Shareholders' Equity (including dividends in arrears) / Number of Outstanding Preferred Shares |
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Profitability Ratio (defined) |
measure aspects of a firm's operating (income/loss) results on a relative basis |
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Gross Profit (defined & formula) |
sales (revenue) after subtracting COGS
Sales (revenue) - COGS |
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Gross Profit Margin (defined & ratio) |
aka "gross profit ratio"
% of each sales dollar that is available to cover expenses and provide a profit
GPM = Gross Profit / (net) Sales |
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(Net) Profit Margin (defined & formula) |
% of each sales dollar that ends up as net income
NPM = Net Income / (net) Sales |
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Return on Assets (defined & formula) |
measures rate of return on total assets and indicates the efficiency with which assets are used
ROA = (NI + int exp) / Average Total Assets |
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Return on Investment (defined & formula) |
measures rate of return on investment and indicates the efficiency with which total equity are invested
ROI = (NI + int exp) / Average Total Investment |
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Return on Owners' Equity (defined & formula) |
rate of return (earnings) on all stockholders' investment
= NI / Average Stockholders' Equity |
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Return on Common Stockholders' Equity (defined & formula) |
rate of return (earnings) on common stockholders' investment
= (NI - Preferred Dividend obligation) / Average Common Stockholders Equity
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Residual Income (defined & formula) |
excess of an entity's dollar amount of income over the dollar amount of its required return on average investment (based on hurdle rate of return)
RI = NI - (Average Invested Capital * Hurdle Rate)
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Economic Value Added (EVA) (defined) |
entity's economic profit (as opposed to accounting profit)
-uses accounting earnings before deducting interest & deducts that from the dollar value of the opportunity cost associated with LT debt and shareholders' equity |
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EVA (formula) |
Earnings Before Interest - [(opportunity cost) * (LT debt + shareholders' equity)]
**cost of capital/hurdle rate may be used as opportunity cost |
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EPS - Earnings Per Share (defined & formula) |
indicates ability to pay dividends to common shareholders
= (NI - Preferred Dividends obligation) / weighted-average number of shares outstanding |
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P/E Ratio - Price/Earnings Ratio |
measure of how the market values the stock; "how many times" EPS is built into the market price of the stock
= Market Price for a Common Share / EPS |
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Common Stock Dividends Payout Rate
2 Bases |
% of earnings distributes to common shareholders
1. total basis 2. per share basis
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CS dividends payout rate - Total Basis (formula) |
Cash Dividends to CS / NI to CS |
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CS dividends payout rate - Per Share Basis (formula) |
Cash Dividends per CS / Earnings per CS |
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Common Stock Yield (defined & formula) |
rate of return (yield) per share of common stock
Common Stock Yield = Dividends per CS / Market price per CS |
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Equity/Investment Leverage Ratios (defined) |
provide measures of relative sources of equity and equity value |
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Debt to Equity Ratio (defined & formula) |
relative amounts of assets provided by creditors and shareholders
= Total Liabilities / Total Shareholders' Equity
where... Total Liabilities = assets - equity Total Shareholders Equity = capital stock + retained earnings |
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Owners' Equity Ratio (defined & formula) |
proportion of assets provided by shareholders
= shareholders' equity / total assets |
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Debt Ratio (defined & formula) |
proportion of assets provided by creditors; extent of leverage in funding the entity
= Total Liabilities / Total Assets |
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Book Value per Common Stock (formula) |
Common Shareholders' Equity / Number of Outstanding Common Shares |
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Book Value per Preferred Share (formula) |
Preferred Shareholders' Equity (including dividends in arrears) / Number of Outstanding Preferred Stock |
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Operational Activity Measures (defined) |
measures the efficiency with which a firm carries out its operating activities; assesses the management of accounts receivable and inventory |
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AR Turnover (defined & what it indicates) |
number of times that AR are incurred and collected during a period
-indicates the quality of credit policies & efficiency of collection procedures |
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AR Turnover (formula) |
(Net) Credit Sales / Average (Net) Accounts Receivable |
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Number of Days Sales in AR (defined & formula) |
average number of days required to collect receivables; average age of receivables
= 300 or 360 or 365 / AR Turnover |
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Inventory Turnover (defined & what it indicates & formula) |
number of times that inventory turns over (is acquired and sold or used) during the period
-indicates over or under stocking of inventory or obsolete inventory
= COGS / Average Inventory |
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Number of Days' Supply in Inventory (defined & what it indicates & formula) |
number of days inventory is held before it is sold or used
-indicates the efficiency of general inventory management
= 300 or 360 or 365 / Inventory Turnover |
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AP Turnover (defined & what it indicates & formula) |
number of times that AP turnover are incurred and paid
-indicates the rate at which an entity pays its average AP & how well it manages paying its obligations
AP Turnover = Credit Purchases / Average AP
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For AP Turnover, what do you do if the amount of credit purchases is unavailable? |
use COGS, adjusted by changes in inventory
(COGS + Ending Inventory - Beginning Inventory) / Average AP |
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Number of days' purchases in average payables (defined & formula) |
average number of days required to pay AP; average age of payables
= 300 + 360 + 365 / AP Turnover |
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Capital Turnover (defined) |
measures how well the number of times that the average owners' equity is represented by sales (revenue) during a period; how well entity is using owners' equity to generate revenue |
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Capital Turnover (formula) |
= Annual Sales (or Rev) / Average Owners' Equity |
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Operating Cycle Length |
average length of time between the acquisition of inventory and the collection of cash from the sale of that inventory; includes the time to collect AR |
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What are the Operating Cycle's 4 Conversion Periods/Sub-Cycles? |
1. inventory conversion cycle
2. AR cycle
3. AP cycle
4. Cash Conversion Cycle |
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Inventory Conversion Cycle (defined) |
average period of time from acquisition of inventory until it is resold (or used)
-measured using the number of days' supply in inventory |
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AR Cycle (defined) |
average period of time from selling inventory on account until AR is collected
-measured using the number of days' sales in AR |
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AP Cycle (defined) |
average period of time from the purchase of inventory on account until the account is paid
-measured using number of days' purchases in AP |
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Cash Conversion Cycle (defined) |
average period of time between when cash is paid to suppliers (for inventory) and when cash is collected from customers
"cash-back-to-cash"
-actual cash outflow and inflow establish start and end of cycle
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Cash Conversion Cycle (formula) |
= Inventory Conversion Cycle + AR Conversion Cycle - AP Conversion Cycle
= Operating Cycle - AP Conversion Cycle |
