9. Financial Ratios

Question 1

What does liquidity ratios measure?

Answer 1

Firm’s short-term ability to pay maturing obligations

Question 2

What does activity ratios measure?

Answer 2

How effectively an enterprise is using its assets

Question 3

What does profitability ratios measure?

Answer 3

Financial performance of an enterprise for a given time period

Question 4

What does investor ratios measure?

Answer 4

Ratios that are of interest to investors

Question 5

What does long-term debt-paying ability ratios measure?

Answer 5

Security for long-term creditors/investors

Question 6

What does common size analysis measure?

Answer 6

Compare company’s performance with performance of other smaller/larger companies with its own performance over time

Question 7

Formula for Working Capital

Answer 7

Current assets - Current liabilities

Question 8

Formula for Current Ratio (working capital ratio)

Answer 8

Current assets / current liabilities

Question 9

Formula for Acid-test Ratio

Answer 9

(Cash equivalents + Marketable securities + A/R) / Current liabilities

Question 10

Formula for Cash Ratio

Answer 10

(Cash equivalents + Marketable securities) / Current liabilities

Question 11

Formula for A/R Turnover

Answer 11

Net credit sales / Average net receivables

Question 12

Formula for A/R Turnover in Days

Answer 12

Average net receivables / Net credit sales / 365

Question 13

Formula for Inventory Turnover

Answer 13

COGS / Average inventory

Question 14

Formula for Inventory Turnover in Days

Answer 14

Avg inventory / COGS / 365

Question 15

Formula for Operating Cycle

Answer 15

AR turnover in days + Inventory turnover in days

Question 16

Formula for Working Capital Turnover

Answer 16

Sales / Average working capital

Question 17

Formula for Total Asset Turnover

Answer 17

Net sales / Avg total assets

Question 18

Formula for Accounts Payable Turnover

Answer 18

COGS / Avg. accounts payable

Question 19

Formula for Days in Accounts Payable

Answer 19

Avg accounts payable / COGS / 365

Question 20

Formula for Net Profit Margin

Answer 20

Net income / Net sales

Question 21

Formula for Return on Total Assets

Answer 21

Net Income / Average total assets

Question 22

Formula for Return on Assets

Answer 22

Net profit margin x Total asset turnover

Net income/Net sales x Net sales / Avg. total assets

Question 23

Formula for Return on Investment

Answer 23

[Net income + Interest exp (1 - Tax Rate)] / [Avg (LT liabilities + Equity)]

Question 24

Formula for Return on Common Equity

Answer 24

Net income - Preferred dividends / Avg. common equity

Question 25

Formula for Net Operating Margin Percentage

Answer 25

Net operating income / Net sales

Question 26

Formula for Gross (Profit) Margin Percentage

Answer 26

Gross (profit) margin / Net sales

Question 27

Formula for Operating Cash Flow Per Share

Answer 27

Operating cash flow / Common shares outstanding

Question 28

Formula for Degree of Financial Leverage

Answer 28

EBIT / Earnings before taxes

Question 29

Formula for Earnings Per Share

Answer 29

Net income - Preferred dividends / Weighted avg. number of common shares outstanding

Question 30

Formula for Price/Earnings Ratio

Answer 30

Market price per share / Diluted earnings per share

Question 31

Formula for Dividend Payout Ratio

Answer 31

Dividends per common share / Diluted earnings per share

Question 32

Formula for Dividend Yield

Answer 32

Dividends per common share / Market price per common share

Question 33

Formula for Book Value Per Share

Answer 33

Total SE - Preferred stock / Number of common shares outstanding

Question 34

Formula for Debt / Equity

Answer 34

Total liabilities / Common stockholders’ equity

Question 35

Formula for Debt Ratio

Answer 35

Total liabilities / Total assets

Question 36

Formula for Times Interest Earned

Answer 36

EBIT / Interest

Question 37

Formula for Operating Cash Flow / Total Debt

Answer 37

Operating cash flow / Total debt