Ch 2.2- Ratios

Question 1

Sources of data

Answer 1

internall (company data supplier data product data)

external (social media, google search)

Question 2

liquidity ratios

Answer 2

measuring the company’s short term abilitiy to pay obligations and needs for cash

Question 3

Solvency ratios

Answer 3

measure companys abiltiy to survice over a long term

Question 4

profitability ratios

Answer 4

measure if the company will be succesffull financial or not

Question 5

3 types of ratio comparisons

Answer 5

ratios independantly are usesless:

so you do
intercompany ratios
intra company ratios
indusstry avaerage conparisons

Question 6

intracompany ratios

Answer 6

compare 2+ periods for a companys own history

Question 7

inter company ratio compairsons

Answer 7

comparing ratios w competiitorsi

Question 8

industry average ratio comparaisons

Answer 8

based on comparing ratios for the infustry averages

Question 9

2 liquidity ratios:

Answer 9

1) working capital ratio
2) current ratio

Question 10

Liquidity ratio 1

Answer 10

Working capital ratio: difference between current assets and current liabilites

WORKING CPAITAL RATIO= CURRENT ASSETS- CURRENT LIABILITIES

If positive: company can pay off liablities
IF negative: company must borrow to cover the diference if money not generated by operations

Question 11

Liquidity ratio 2

Answer 11

current ratio: dividing current assets/current liablitiies

compares relative relation between current assets and laibilities

Question 12

current ratio insights

Answer 12

higher is generally better, but too high is bad because cash is a non producing asset

generally should be higher than 1:1

Question 13

Long term lenders look at which ratios?

Answer 13

solvency ratios

Question 14

solvency ratio types:

Answer 14

Debt to total assets ratio

Question 15

Debt to total assets ratio

Answer 15

measures the amount of financing (debt) provided by creditors rather than by shareholders as a percentage of assets.

Total Liabilities/Total Assets

Question 16

Why is the debt to total assets ratio important to consider?

Answer 16

Basically in this we are trying to see how much debt the company has (bc owing money to creditors is riskier than owing shares to shareholders- bc you haveee to pay debt back NOT EQUITY!!!)

Question 17

Profitability ratios

Answer 17

Basic earnings per share ratio

price-earnings ratio

Question 18

Basic earnings per share ratio

Answer 18

measures the income earned on a per share basis (income available to common shareholders/weighted avg number of common shares)

IT IS SO IMPORTANT THAT PUBLIC COMPANIES MUSSST INCLUDE IT IN FS

Question 19

Price Earnings Ratio

Answer 19

Market Price per share/ basice earnings per share

ratio provides a way to use basic EPS to compare two companies, something that cannot be done with the basic EPS itself.

Question 20

The P-E ratio helps investors assess how a company’s share price relates to its net income or earnings per share

Answer 20

The P-E ratio helps investors assess how a company’s share price relates to its net income or earnings per share

Question 21

he P-E ratio is an important indicator of what investors expect of a company’s future profitability (see Decision Tool). This ratio will be higher if investors think that current income (meaning earnings) will increase, and it will be lower if investors think that income will decrease. For example, the P-E ratios of Amazon and Shopify are much higher than the P-E ratios of Royal Bank and Manulife because investors believe that Amazon and Shopify are more likely to have higher net income in the future. However, if the growth expectations for companies with a high P-E ratio are not met, this can cause a significant reduction in the company’s share price. This explains why investing in companies with high P-E ratios has more risk than investing in those with lower ratios.

Answer 21

he P-E ratio is an important indicator of what investors expect of a company’s future profitability (see Decision Tool). This ratio will be higher if investors think that current income (meaning earnings) will increase, and it will be lower if investors think that income will decrease. For example, the P-E ratios of Amazon and Shopify are much higher than the P-E ratios of Royal Bank and Manulife because investors believe that Amazon and Shopify are more likely to have higher net income in the future. However, if the growth expectations for companies with a high P-E ratio are not met, this can cause a significant reduction in the company’s share price. This explains why investing in companies with high P-E ratios has more risk than investing in those with lower ratios.

Question 22

If there are preffered shares than

Answer 22

net income is NOT equal to the income avaialble to shareholders

Question 23

If there ar eno preferred shares then

Answer 23

net income is equal to the income available to common shareholders.

Question 24

which ratio measures debt to creditors

why do we care

Answer 24

Solvency ratio: debt2 assets (liabilities are owed to creditors)

cuz owing lots of liabilities (to creditors) bad