Appendix I - Financial Ratios Flashcards
Ratios Question TIP:
In questions when both the numerator and denominator are affected by a given change, the final result (increase or decrease) is hard to determine. SO, to answer these, make up numbers and plug them into the ratio formula.
Which Financial Ratio Classification is this?
Financial measures of a firm’s short-terms ability to pay maturing obligations
Liquidity Ratios
Which Financial Ratio Classification is this?
Measures the financial performance of an enterprise for a given time period
Profitability Ratios
Which Financial Ratio Classification is this?
Measures of security for long-term creditors/investors
Long-term Deb-Paying Ability Ratios (coverage ratios)
Which Financial Ratio Classification is this?
Measures how effectively an enterprise is using its assets
Activity Ratios
Analysis used to compare a company’s performance with the performance of other small/larger companies or with its own performance over time?
Common size Financial Statements.
Both Horizontal and Vertical
How is the common size BS and IS drafted?
BS = Divide each balance by total assets
IS = Divide each IS amount by total revenue.
Ratios analysis is useful in comparing norms in an industry and can be used to analyze trends over time
Benchmarking can be done against competitors or industry averages
What is the formula for the current ratio and what is it also called?
Its also called the working capital ratio
CR = CA / CL
WC = CA - CL
The current ratio is a measure of ?
A company’s ability to meet its short-term obligations
What is the formula for the acid-test ratio?
ATR = (Cash Equiv. + Marketable Securities + AR) / CL
Also, calc’d as:
Liquid assets = (Total current assets) – (Inventories + Prepaid expenses) / CL
What is the formula for the cash ratio?
(Cash Equiv. + Marketable Securities) / CL
What is the formula for the AR turnover, and the AR turnover in Days?
AR TO = Net Credit Sales / Average Net Receivables
AR TO in Days = 365/ AR TO
AR TO in Days also = Avg. Net Receivables / (Net Credit Sales / 365)
What does the AR TO ratio indicate?
AR quality and the success of the firm in collecting outstanding AR. Faster TO gives credibility to the current/acid-test ratios.
What does the AR TO ratio indicate?
The average number of days required to collect AR
What is the inventory TO formula?
INV TO = COGS / AVG INVENTORY
What does the inventory TO measure?
How quickly inventory is sold and is an indicator of enterprise performance. Higher the TO the better
What is the inventory TO in days formula?
What does this ratio indicate?
INV TO in Days = 365 / INV TO
INV TO in Days also = AVG INV / (COGS / 365)
The ratio indicates the average number of days required to sell inventory
What is the formula for the operating cycle? And, what does it indicate?
AR TO in days + Inventory TO in days.
Indicates the number of days between acquisition of inventory and realization of cash from selling the inventory
What is the formula for the working capital TO ratio and what does it indicate?
WC TO = Sales / Average WC
This ratio indicates how effectively working capital is used.
Note = Avg WC is Beg WC + End WB / 2
What is the Total Asset TO formula and what does it indicate?
Net Sales / Average Total Assets
It indicates of how well a company makes use of its assets. Higher ratio indicates effective use to generate sales
What is the formula for Accounts Payable TO and what does it indicate?
AP TO = COGS / Average AP
Indicates the number of times payables turn over during the year. Low TO may indicate delay in payment like a shortage of cash.
What’s the formula for Days in Accounts Payable and what does it indicate?
Average AP / (COGS / 365)
Indicates the average length of time trade payable are outstanding before they are paid
What’s the formula for Net Profit Margin Ratio
NI / Sales
