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40 Cards in this Set
- Front
- Back
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Current Ratio
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Current assets / Current Liabilities
Higher current ratio means a company will be able to pay its short term bills. |
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Quick ratio
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(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. |
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What are marketable securities?
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Very liquid securities
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Cash Ratio
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(Cash + marketable securities) / Current liabilities
Most conservative liquid measure |
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Receivables Turnover
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net annual sales / average receivables
Measure of accounts receivables liquidity. Best if ratio is close to industry norm. |
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average receivables collection period
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365 / receivables turnover
How long does it take for a company's customers to pay its bills? |
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inventory turnover
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cost of goods sold / average inventory
measure efficiency of a firm w/ respect to its processing and inventory management |
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average inventory processing period
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365 / inventory turnover
Low number may indicate that there is not enough stock on hand. |
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payables turnover ratio
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cost of goods sold / average trade payables
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Payables payament period
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365 / payable turnover ratio
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Cash conversion cycle
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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 |
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What are the operating profitability ratios?
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include the gross profit margin, operating profit margin, net profit margin, common size income statement, return on total capital, and return on toatl equity
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total asset turnover
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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. |
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fixed asset turnover
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measures the utilization of fixed assets:
net sales / average net fixed assets |
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equity turnover
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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. |
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What do operating profitability ratios look at?
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How good management is at turning their efforts into profits. Compare the top of the income statement (sales) to profits)
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What is gross profit?
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Net Sales - COGS
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Operating profits
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Earnings before interest and taxes = EBIT
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Net income
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Earning after taxes but before dividends
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Total capital
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long term debt + short term debt + common and referred equity
= total assets |
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gross profit margin
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gross profit / net sales
(shouldn't be too low) |
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Operating Profit margin
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EBIT / net sales
shouldn't be too low |
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net profit margin
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net income / sales
shouln't be too low net income should be based on continuing operations |
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return on total capital
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(net income + interest expense) / average total capital
this ratio shouldn't be too low interest expense should be gross interest expense |
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return on total equity
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net income / average total equity
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Return on owner's equity
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(net income - preferred dividend) / average common equity
= net income available to common / average common equit |
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business risk
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st. deviation of EBIT / mean EBIT
use between five and ten years of data. Shouldn't be too high |
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sales variability
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std. deviation of sales / mean sales
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operating levarage
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mean [ absolute value (% change OE / % change sales)]
measures how much of the company's productin costs are fixed (as opposed to variable). |
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debt to equity ratio
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total long term debt /
total equity total long term debt = long term liabilities + deferred taxes + present value of lease obligations |
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long term debt to total long term capital
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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. |
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total debt ratio
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(current liabilities + total long term debt) / (total debt + total equity)
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total interest bearing debt to total funded capital
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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 |
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interest coverage
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earnings before interest and taxes / interest expense
lower ratio implies that the firm will have difficulty meeting its debt payments. |
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fixed financial cost ratio
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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 |
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cash flow to long term debt
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CFO / (Book value of long term debt + present value of perationg leases)
determines the ability of a company to meet its debt obligations |
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cash flow ot total debt ratio
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cfo / (total long term debt + current interest bearing liabilities)
Lower ratio means that the firm will have difficulty meeting its debt payment |
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sustainable growth rate
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g = retention rate * ROE
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reterntion rate
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1 - (dividends declared / operating income after taxes)
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divident payout ratio
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dividends declared / operating income after taxes
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