Ch 2.2- Ratios Flashcards
Sources of data
internall (company data supplier data product data)
external (social media, google search)
liquidity ratios
measuring the company’s short term abilitiy to pay obligations and needs for cash
Solvency ratios
measure companys abiltiy to survice over a long term
profitability ratios
measure if the company will be succesffull financial or not
3 types of ratio comparisons
ratios independantly are usesless:
so you do
intercompany ratios
intra company ratios
indusstry avaerage conparisons
intracompany ratios
compare 2+ periods for a companys own history
inter company ratio compairsons
comparing ratios w competiitorsi
industry average ratio comparaisons
based on comparing ratios for the infustry averages
2 liquidity ratios:
1) working capital ratio
2) current ratio
Liquidity ratio 1
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
Liquidity ratio 2
current ratio: dividing current assets/current liablitiies
compares relative relation between current assets and laibilities
current ratio insights
higher is generally better, but too high is bad because cash is a non producing asset
generally should be higher than 1:1
Long term lenders look at which ratios?
solvency ratios
solvency ratio types:
Debt to total assets ratio
Debt to total assets ratio
measures the amount of financing (debt) provided by creditors rather than by shareholders as a percentage of assets.
Total Liabilities/Total Assets
Why is the debt to total assets ratio important to consider?
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!!!)
Profitability ratios
Basic earnings per share ratio
price-earnings ratio
Basic earnings per share ratio
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
Price Earnings Ratio
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.
The P-E ratio helps investors assess how a company’s share price relates to its net income or earnings per share
The P-E ratio helps investors assess how a company’s share price relates to its net income or earnings per share
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.
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.
If there are preffered shares than
net income is NOT equal to the income avaialble to shareholders
If there ar eno preferred shares then
net income is equal to the income available to common shareholders.
which ratio measures debt to creditors
why do we care
Solvency ratio: debt2 assets (liabilities are owed to creditors)
cuz owing lots of liabilities (to creditors) bad
