ACCT RATIOS Flashcards
Current ratio
Current ratio =
Current Assets/Current Liabilities
Measures short term debt paying ability
Higher = better
Acid Test
Acid Test = Cash + Short term investments + AR/ Current Liabilities
Immeidate short term debt paying ability
Higher = better
Just like the current ratio, but excludes inventory and prepaid expenses (cuz u cant actually pay off liabilities with prepaid exp, or inventory, so acid test is a stricter version of current ratio)
Receivables Turnover
Receivables Turnover = Net credit sales/ Average gross AR
Measures liquidity of receivables
Higher = better
Collection Period
Collection Period = Days in year / Receivables turnover
(Receivables turnover (net credit sales/ average gross AR)
Measures # of days receivables are outsanding
Lower = Better
Days sales in inventory
Days sales in inventory = Days in year/ Inventory Turnover
(Inventory turnover = cogs/average inventory)
Meaures # of days in inventory is on hand
Lower = better
Operating cycle
Operating cycle = days sales in inventory + collection period
Days in sales inventory = days in year/inventory turnover
Collection period = days in year/inventory turnover
Measures # of days to purchase inventory, sell it on account and collect the cash
Lower = better
Debt to total assets
Debt to total assets = Total liabilities/Total assets
Measures % of total assets provided by creditors
Lower = better
Interest coverage
Interest coverage = Profit + interest exp + income tax exp (EBIT)/ Interest expense
Measures ability to meet interest payments
Higher = better
Free cash flow
Free cash flow = Cash provided (used) by operating activities – Cash used by investing activities
Measures cash generated from operating activities that management can use after paying capital expenditures
Higher = better
Gross profit margin
Gross profit margin = Gross profit/Net sales
Measures margin between selling price and cost of goods sold
Higher = better
Net sales = Sales – Sales Returns and allowances and discounts
Gross profit = NET Sales – COGS
Profit margin
Profit margin = Profit/Net sales
- Measures amount of profit generated by each dollar of sales
- Higher = better
- Net sales = Sales – Sales Returns and allowances and discounts
- Gross profit = NET Sales – COGS
Asset turnover
Asset turnover = Net sales/average total assets
Measures how efficiently assets are used to generate sales
Higher = better
(ROA) Return on assets
Return on assets = Profit/Average total assets
Measures Overall profitability of assets
Higher = better
ROE (return on equity) =
ROE (return on equity) = Profit/Average shareholders equity
Measures profitability of shareholders investment
Higher = better
EPS (earning per share)
EPS (earning per share) = Profit – Preferred dividends/ Weighted # of common shares
Measures amount of profit earned on each common share
Higher = better
Price earning
Price earning = Market price per share/ EPS
EPS = Profit – pref dividneds/weighted average # of common shares
Measures relationship between market price per share and earning per share
Higher = better
Payout
Payout = cash dividends/ profit
Measures % of profit distributed as cash dividends
Higher = better
Net Sales
Net Sales = Gross Sales – (Returns, Allowances and Discounts)
Gross Profit
Net Sales−COGS
Net Profit
Net Profit=Gross Profit−Operating Expenses−Taxes−Interest
Working Capital
Working Capital = Current assets – Current liabilities
Measures a companys short term financial health (do they have enough cash, inventory ect to cover bills like loans and payables)
Higher = better
