Ch4 Flashcards
…are the tools used in financial analysis and they are grouped into five categories: (1) Liquidity, (2) asset management, (3) debt management, (4) profitability, and (5) market value.
Ratios
….are used to measure a firm’s ability to meet its current short-term obligations as they come due. (Can we make required payments?)
Liquidity ratios
…is the most commonly used measure of short-term solvency. Its equation is: =Current assets/current liability
Current ratio
a firm is having financial difficulty, it typically begins to pay its accounts payable more slowly and to borrow from the bank—both of which will increase its ….
causing a decline in the current ratio.
current
liabilities
The …. is a measure of a firm’s ability to pay off short-term
obligations without relying on the sale of
inventories
, which are typically the least liquid of a firm’s current assets.
quick ratio
Equation of quick ratio is:
Current assets-inventories/current liabilities
….. indicates how many times during the year inventory is
sold and restocked (indicates how quickly inventory is sold,)
inventory turnover ratio =Cost of goods sold/inventories
… is unproductive and represents an investment with a
low rate of return.
Excess inventory
The…..ratio is also called the average collection period (ACP).
days sales outstanding (DSO)= Receivable/annual sales/365
The …. measures how effectively the firm uses its plant and equipment.
fixed assets turnover ratio = sales/net fixed assets
The ….. measures how effectively the firm uses its total assets and whether the firm generates enough sales given its total assets
total assets turnover ratio= sales/ total assets
…measure the extent to which a firm uses financial leverage and the degree of safety afforded to
creditors
debt management ratios
ratio analyzes debt by looking at the firm’s
balance sheet
Debt-to-capital ratio
ratios analyze debt by looking at the firm’s
income statement
Times interest earned ratio (TIE)
(3) EBITDA coverage ratio
measures the percentage of funds provided by
debtholders
debt-to-capital ratio
The … measures the extent to which
operating income can decline before the firm is unable to meet its annual interest payments.
interest earned ratio
High debt ratios that exceed the industry average may make it costly for a firm to borrow additional funds without first raising more ..
Equity
EBIT is used as the numerator because ..
is paid with pretax dollars—the firm’s ability to pay … is not affected by taxes.
Interest
…indicates what percentage of sales remain after operating costs are accounted for. It is a measure of the firm’s operating efficiency.
Operating margin
… indicates what percentage of sales
net income represents. It measures the firm’s combined impact of operating efficiency and leverage on the firm’s profitability
Profit Margin=Net income/sales
.. measures the return on all the firm’s assets
after
interest and taxes.
return on total assets (ROA)=net income/total assets
The… shows the earning power of the firm’s assets before taxes and debt and is useful for comparing firms with different debt ratios and tax rates
basic earning power (BEP) ratio
… shows the after-tax operating return on total invested capital, which is equal to the sum of debt and equity (assuming no preferred stock is issued).
return on invested capital (ROIC)
… measures the return on common stockholders’
investment.
return on common equity (ROE)
give management an indication of what investors think of the company’s risk and future prospects.
Market value ratios
…. ratio shows how much investors are willing to pay per dollar of current
earnings
Price/Earnings (P/E)
..are high for firms with strong growth prospects and relatively little risk but low for slowly growing and risky firms
P/E ratios
.. is another indication of how investors regard a firm
Market/Book (M/B) ratio
companies with
low risk and high growth have high
M/B ratios.
M/B ratios typically exceed …which means that investors are willing to pay more for stocks than their accounting book values.
one
Market value of equity + Market value of total debt + Market value of other financial claims – Cash and equivalents.
Enterprise value
If Current ratio is less than 1 it..
increase
if current ratio is greater than 1 it..
decrease
ratio is used to assess the right mix of debt and equity in a company?
Debt-to-capital ratio
DuPont equation help analyze in financial performance
Return on equity (ROE)
