1 Financial Ratios (1.54)

Question 1

Current Ratio

And what type of ratio?

Answer 1

Current Assets ÷ Current Liabilities

(a liquidity ratio)

Question 2

Quick Ratio

And what type of ratio?

Answer 2

(Current Assets – Inventories) ÷ Current Liabilities

(a liquidity ratio)

Question 3

Working Capital

And what type of ratio?

Answer 3

Current Assets – Current Liabilities

(a liquidity ratio)

Question 4

Inventory Turnover

And what type of ratio?

Answer 4

Cost of Goods Sold ÷ Average Inventory

(an activity ratio)

Question 5

Days to Sell Inventory

And what type of ratio?

Answer 5

365 ÷ Inventory Turnover

OR

Average Inventory ÷ Cost of Goods Sold × 365

(an activity ratio)

Question 6

Accounts Receivable Turnover

And what type of ratio?

Answer 6

Sales (credit) ÷ Average Accounts Receivable

(an activity ratio)

Question 7

Receivable Collection Period

And what type of ratio?

Answer 7

365 ÷ Accounts Receivable Turnover

OR

Average Accounts Receivable ÷ Sales (credit) × 365

(an activity ratio)

Question 8

Gross Profit Margin

And what type of ratio?

Answer 8

Gross Profit ÷ Sales

(a profitability ratio)

Question 9

Operating Profit Margin

And what type of ratio?

Answer 9

Operating Income ÷ Revenue

(a profitability ratio)

Question 10

Return on Assets (ROA)

And what type of ratio?

Answer 10

EAT ÷ Total Assets

(a profitability ratio)

EAT = Earnings After Tax, aka, Net Profit or “Bottom Line”

Question 11

Return on Equity (ROE)

And what type of ratio?

Answer 11

EAT ÷ Equity

(a profitability ratio)

EAT = Earnings After Tax

Question 12

Debt to Equity

And what type of ratio?

Answer 12

Total Long-Term Debt ÷ Equity

(a debt ratio)

Question 13

Times Interest Earned

And what type of ratio?

Answer 13

EBIT ÷ Interest Expense

(a debt ratio)

EBIT = Earnings Before Interest and Taxes
Aka TIE ratio or Interest Coverage ratio
(i.e., the multiple of Interest Expenses that you’ve earned before interest expenses & taxes are included)

Question 14

Debt Ratio

And what type of ratio?

Answer 14

Total Debt ÷ Total Assets

(a debt ratio)

Question 15

Front-End Ratio
(and typical preferred maximum)

Answer 15

PITI / Gross Income
< 28%

(a home-buying ratio)

PITI = Principle + Interest + Tax + Insurance

Question 16

Back-End Ratio
(and typical preferred maximum)

Answer 16

(PITI + Other Debt Expenses) ÷ Gross Income
< 36%

(a home-buying ratio)

PITI = Principle + Interest + Tax + Insurance

Question 17

Gross Profit

Answer 17

Revenue – COGS

Question 18

Operating Profit

Answer 18

Revenue – COGS – OpEx

also called “EBIT” (Earnings Before Interst & Taxes)

aka Gross Profit – Operating Exepnses

Question 19

Housing Cost Ratio

(and max to get approved for a mortgage)

1.78

Answer 19

PITI ÷ Gross Household Income

≤ 28%

aka Front-End Ratio or Mortgage Debt Service Ratio

Question 20

(Personal) Total Debt Ratio

(and max to get approved for a mortgage)

1.78

Answer 20

(PITI ÷ Consumer Debt) ÷ Gross Household Income

≤ 36%

aka Back-End Ratio or Debt Repayment Ratio

Consumer debt includes auto loans, student loans, credit cards, & unsecured debt (so really any personal debt).

Question 21

Consumer Debt Ratio
and Max

(and max to get approved for a mortgage)

1.78

Answer 21

Non-Housing Debt ÷ Net Household Income

≤ 20%

this one is net income, after income taxes

Consumer debt includes auto loans, student loans, credit cards, & unsecured debt (so really any personal debt).

Question 22

Mortgage Debt Service Ratio

Same as?

1.78

Answer 22

Front-End Ratio
Housing Cost Ratio

Question 23

(Personal) Debt Repayment Ratio

Same as?

1.78

Answer 23

Back-End Ratio
Total Debt Ratio