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9 Cards in this Set

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-Financial indicators that distill relevant information about a business entity by quantifying the relationship among selected items on the F/S's.
-May be compared to ratios of a different period or to industry ratios. These comparative analyses identify trends that may seem important to investors, lenders, and other interested parties.
Types of Financial Ratios
1. Liquidity Ratios: measures a firm's short-term ability to pay maturing obligations.
2. Activity Ratios: measures how effectively an enterprise is using its assets.
3. Profitability Ratios: measures of the success or failure of an enterprise for a given time period.
4. Long-Term Debt-Paying Ability (Coverage) Ratios: measures of security for long-term creditors / investors.
Liquidity Ratios
1. Working Capital = Current Assets - Current Liabilities*
2. Current Ratio (Working Capital Ratio) = Current Assets ÷ Current Liabilities*
*Measures ability to meet short term obligations
3. Acid Test Ratio = (Cash equivalents + Marketable securities + Net receivables) ÷ Current liabilities*
4. Cash Ratio = (Cash equivalents + Marketable securities) ÷ Current liabilities*
*Measures ability to meet short term obligations
Activity Ratios
1. A/R Turnover = Net credit sales ÷ Average net receivables
-Indicates receivables quality and indicates the success of the firm in collecting outstanding receivables.
2. A/R Turnover in Days = Average net receivables ÷ (Net credit sales ÷ Receivable turnover)* or
2. A/R Turnover in Days = 365 days ÷ Receivable turnover*
*Indicates the average number of days required to collect accounts receivable.
3. Inventory Turnover = COGS ÷ Average Inventory
-Measure of how quickly inventory is sold, indicator of enterprise performance.
4. Inventory Turnover in Days = Average inventory ÷ (GOGS ÷ 365)* or
4. Inventory Turnover in Days = 365 days ÷ Inventory Turnover*
*Indicates the average number of days to sell inventory
5. Operating Cycle = A/R turnover in days + Inventory turnover in days
-Indicates the number of days between acquisition of inventory and realization of cash from selling the inventory.
Activity Ratios
1. Working Capital Turnover = Sales ÷ Average working capital
-Indicates how effectively working capital is used.
2. Total Asset Turnover = Net sales ÷ Average total assets
-Indicator of how the firm makes effective use of its assets, higher ratio indicates effective asset use to generate sales.
Profitability Ratios
1. Net Profit Margin = Net income ÷ Net sales
-Indicates the profit rate and when used w/ the asset turnover ratio, the return on assets.
2. Return on Total Assets = Net income ÷ Average total sales
3. DuPont Return on Assets = Net profit margin x Total asset turnover
-Net profit margin indicates the percent return on each sale while asset turnover indicates the effective use of assets in generating that sale.
Profitability Ratios
1. Return on Investment = (Net income + Interest expense (1 - Tax rate)) ÷ (Average (Long-term liabilities + Equity))
-Measures the performance of the firm w/out regard to the method of financing.
2. Return on Common Equity = (Net income - Preferred dividends) ÷ Average common equity
Long-Term Debt-Paying Ability Ratios
1. Debt / Equity = Total liabilities ÷ Common stockholders' equity
-Indicates the degree of protection to creditors in case of insolvency, the lower the better.
2. Debt Ratio = Total liabilities ÷ Total assets
-Indicates what amount of assets are financed by creditors
3. Times Interest Earned = Recurring income before taxes and interest ÷ Interest
-Reflects ability of company to cover interest charges.
4. Operating CF / Total Debt = Operating CF ÷ Total debt
-Indicates the ability of the company to cover total debt w/ yearly cash flow.
Limitations to Ratios
-Although easy to compute, they depend entirely on the reliability of the data on which they are based (ex: estimates and historical cost).
-Additional information is also valuable when analyzing a company: common size analysis (vertical and horizontal), industry statistics, trend analysis, etc.