6 Basic Financial Ratios Flashcards
Name some common financial ratios
- Working capital ratio
- Quick ratio
- Earnings per share (EPS)
- Price-Earnings (P/E) ratio
- Debt-Equity ratio
- Return on Equity
What is working capital
Working capital represents the difference between a firms current assets and current liabilities
AY BAWS CAN I HABE DE NOTE PLZ
Assessing the health of a company is related to understanding its liquidity - how easily it can turn assets into cash to pay short-term obligations
How do you work out the working capital ratio
Divide the current assets by the current liabilities
How to tell the difference between 2 companies with the same working capital ratio
The company with more money in its current assets will be better off as its more readily able to pay off its debts
What is the quick ratio also known as
The acid test
How do you calculate the quick ratio
(current assets - inventories) / liabilities
What is the point of the quick ratio
Shows how well the current liabilities are covered by cash and by items with a ready cash value.
Inventories on the other hand takes time to sell and convert into liquid assets
What is a good quick ratio
1:1
What does a low quick ratio mean
It means that these companies may turn their inventories over quickly
What is earnings per share
Earnings per share measures net income earned on each share of a company’s common stock
How is EPS measured
Net income divided by the weighted average number of common shares outstanding during the year
What does the P/E reflect
It reflects the investors’ assessments of the future earnings of a company
How do you calculate P/E ratio
Share price/EPS
What does a P/E ratio of 10 tell you about what you are buying from a company
It shows that you are paying $10 for every generated dollar of annual earnings of the company and therefore you think you will get this money back as the earnings grow over time
