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27 Cards in this Set
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Simple rate of return formula

Rate of Return = Income÷Cost/Investment


Current ratio. What is the formula? What does the formula indicate? What is an acceptable ratio?

Current ratio = current assets ÷ current liabilities. Current ratio is the standard measure of any business' financial health. A ratio of 2 or higher is acceptable. This 2:1 ratio indicates there are twice as many assets as liabilities.


Quick ratio. What is the formula? What does the formula indicate? What is an acceptable ratio?

Quick ratio = Current assets minus inventories (illiquid current assets) ÷ current liabilities. This formula also called the "acid test" measures a business' liquidity. A quick ratio of 1 or better is considered acceptable. A quick ratio of 1 indicates 1 liquid dollar for every one dollar of current liability.


Return on equity. What is the formula? What does the formula indicate? What is an acceptable ratio?

Return on equity = Net income (or net profit) ÷ Average total owner's equity (or average shareholder equity for period). ROE reveals how much net income or profit was earned compared to total shareholder's/owner's equity. The acceptable ratio depends on the industry, but generally the higher the better when it comes to returns.


Operating Margin. What is the formula? What does the formula indicate? What is an acceptable ratio?

Operating margin = operating income ÷ net sales(total revenue). Remember Net Sales is the total amount received from store customers less any returns ie total sales revenues. Operating margin is an indication of management's efficiency compared to operations of its competitors. A business that has a higher operating margin than its industry's average tends to have lower fixed costs and better gross margin, which gives management more flexibility in determining prices.


Gross Margin. What is the formula? What does the formula indicate? What is an acceptable ratio?

Gross Margin = Net sales  cost of goods sold ÷ net sales. Gross Margin shows the difference between sales and the total cost of the merchandise sold. An acceptable ratio depends on the industry.


Inventory turnover. What is the formula? What does the formula indicate? What is an acceptable ratio?

Inventory turnover = cost of goods sold ÷ average inventory value. This ratio tell how often a business' inventory turns over during the course of the year. Because inventories are the lease liquid form of asset, a high inventory turnover ratio is generally positive.


Return on sales. What is the formula? What does the formula indicate? What is an acceptable ratio?

Return on sales = net income ÷ net sales. This ratio compares after tax profit to sales. It can help you determine if you are making enough of a return on your sales effort. An acceptable ratio would industry specific.


Asset turnover. What is the formula? What does the formula indicate? What is an acceptable ratio?

Asset turnover = net sales ÷ average total assets. Calculates the total sales (revenue) for every dollar of assets a company owns. The higher the asset turnover ratio the better, industry specific.


Return on assets. What is the formula? What does the formula indicate? What is an acceptable ratio?

Return on assets = net income ÷ average total assets (for the period). ROA tells an investor how much profit a company generated for ever $1 in assets  it measures a company's earnings in relation to all of the resources it had at its disposal. Very industry specific. For example car and airplane manufacturers require lots of assets to earn a profit whereas advertising companies and software companies require less assets.


Long term debt to capital. What is the formula? What does the formula indicate? What is an acceptable ratio?

Long term debt to capital = long term debt ÷ long term debt + owner's equity. Ratio shows long term debt to capital. Indication of risk.


Receivable collection. What is the formula? What does the formula indicate? What is an acceptable ratio?

Receivable collection = average accounts receivable ÷ (net sales/365 days). Shows a company's efficiency in collecting receivables. Acceptable ratio?


Revenue growth. What is the formula? What does the formula indicate? What is an acceptable ratio?

Revenue growth = this year's net sales  last year's net sale ÷ last year's net sales. Shows growth. Acceptable ratio?


Gross margin. What is the formula? What does the formula indicate? What is an acceptable ratio?

Gross margin = net sales ÷ net sales  cost of sales. Gross
Margin shows the difference between sales and the total cost of the merchandise sold. An acceptable ratio depends on the industry. 

Working capital. What is the formula? What does the formula
indicate? What is an acceptable ratio? 
Working capital = current assets  current liabilities. Working capital is the number one reason most people look at a balance sheet. It reveals the "current" financial condition of a business. One of the main advantages of looking at the working capital position is being able to foresee any financial difficulties that may arise. A company with billions in fixed assets will quickly find itself in bankruptcy court if it can't pay its monthly bills. Generally the more working capital the better but in any case enough is needed to get a company through any unforeseen cash flow difficulties.


Formula for Assets on a Balance sheet.

Assets = liabilities + equity


Formula for Equity on a Balance sheet.

Equity = Assets  liabilities


Gross margin. What is the formula? What does the formula indicate? To what is Gross margin often referred?

Gross margin = Maintained Markup (MMU)  alteration expense + cash discounts. It is the final markup that is obtained by the retailer upon selling merchandise in inventory. Gross margin is often referred to as the buyer's report card.


Gross profit. What is the formula?

Gross profit = gross sales  the cost of goods ** note the cost of goods prior to considering selling and general expenses, incidental income, and income deductions.


Net price. What is the formula? What does the formula indicate? What is another name for net price?

Net price = list price  (list price x trade discount). Net price is the amount a retailer must pay to the supplier for a particular piece of merchandise. Also called "retailer's cost price".


Mortgage constant

Mortgage constant = principal + interest ÷ loan amount


Return on investment

Return on investment = net operating income ÷ total investment (debt and equity)


Loan to value ratio

Loan to value ratio = loan amount ÷ property value


Debt coverage ratio

Debt coverage ratio = net operating income divided by debt service


Cash on cash return

Cash on cash return = cash flow divided by cost


How do you determine projected NOI?

Projected NOI = Total potential income  vacancy/loss reserve  operating expenses. *remember to deduct a management fee even if current management does not.


What are the two components of value in an income producing property?

(1) periodic return to the investor in the form of "income" and (2) proceeds from an assumed sale of the property commonly referred to as the "residual"
