Chapter 14 Ratios Flashcards
Horizontal Analysis
Base Amount
Year-over-year Trend analysis using amounts or %
Base Amount = Value of Base Year
Vertical Analysis
Base Amount in
1. Stmt of Financial Position
2. Stmt of Income
Compare within a year on CASH or ASSETS
a.k.a. Common Size Analysis
- Stmt of Financial Position
Base Amount = Total Assets - Stmt of Income
Base Amount = Sales or Revenue
(Largest in Stmt)
Ratios measure a company’s short-term ability to pay its maturing obligation and to meet unexpected needs for cash
Liquidity ratios
- Working Capital
- Current Ratio
- Receivables Turnover
- Average Collection Period
- Inventory Turnover
- Days in Inventory
Working Capital
= Current Assets - Current Liabilities
($)
Short-term debt-paying ability
+
Liquidity ratio (not always good)
Current Ratio
= Current Assets / Current Liabilities
(: 1)
Short-term debt-paying ability
+
Liquidity ratio (not always good)
If current ratio is high but inventory / receivable turnover is low → INFLATED no good
Receivables Turnover
= Sales / Average Gross Receivables
(credit sales only)
(Times)
Measures # of times of receivables collected during the period
+
Liquidity ratio
Average Collection Period
= 365 / Receivables Turnover
= 365 / [Sales / Average Gross Receivables]
(Day)
of Days to collect outstanding receivables
賬款到賬天數
Strict collection policies reduce sales & clients.
-
Liquidity ratio
Inventory Turnover
= CoGS / Average Total Inventory
(Times)
Measures the # of times that inventory is sold (turn into CoGS) during the period
+
Liquidity ratio
Days in Inventory
= 365 / Inventory Turnover
= 365 / [CoGS / Avg Total Inventory]
(Day)
Measures the # of days to sell inventory during the period
-
Liquidity ratio
Ratios that measure a company’s ability to pay its liabilities
Solvency ratios
- Debt to Total Assets ratio
1’. Debt to Equity ratio - Times Interest Earned
- Free Cash Flow
Debt to Total Assets
= Total Liabilities / Total Assets
(%)
Measures % of total assets financed with debts
An index of ability to pay debts
-
Solvency ratio
Debt to Equity ratio
= Total Liabilities / Total Shareholders’ Equity
(%)
Shows the use of borrowed funds
relative to the equity provided by shareholders
-
Solvency ratio
Times Interest Earned
= EBIT / Interest Exp
= *[Net Income + Int Expense + I/Tax Exp] / * Int Expense
(Times)
(EBIT = Income form operations)
Ability to meet interest payments
+
Solvency ratio
Free Cash Flow
= net Cash provided by Operating
- net Capital Expenditures
- Dividends paid
(Cash is from Stmt of Cash Flow)
($)
Measures cash-generating capability.
Cash left over from operating, capital expenditures & dividends.
+
Solvency ratio
Ratios that measure a company’s operating success for a period of time by using assets efficiently to generate enough revenue
Profitability Ratios
- Gross Profit Margin
- Profit Margin
- Assets Turnover
- Return on Assets
- Return on Common Shareholders’ Equity
- Basic Earnings per Share
- Price-Earnings (P-E) Ratio
- Payout Ratio
- Dividend Yield
Gross Profit Margin
= Gross Profit / Sales
= [Sales - CoGS] / Sales
(%)
Margin between selling price and cost, indicating ability to maintain adequate selling price above cost
+
Profitability ratio
Profit Margin
= Net Income / Sales
(%)
Indicates net income generated by each dollar of sales, indicating effectiveness of expenses control (operating exp, interest exp, i/tax exp)
+
Profitability ratio
Asset Turnover
= Sales / Average Total Assets
(Times)
(only for merchandise companies)
Efficiency of assets used to generate sales
+
Profitability ratio
Return on Assets
= Net Income / Average Total Assets
(%)
= Profit Margin x Asset Turnover
measures overall profitability of assets
by profit earned on each dollar of assets
+
Profitability ratio
Return on Common Shareholders’ Equity
= (Net Income - Preferred Dividends) / Average Common Shareholders’ Equity
[Common S/E = Common Share + Retained Earnings ONLY]
(%)
Net income earned as % of common shareholders’ investment
(so no preferred shares &
no other comprehensive income)
+
Profitability ratio
Payout Ratio
= Cash Dividends Declared / Net Income
(%)
% of net income distributed as cash dividends
+ (but - if seeking price appreciation)
Profitability ratio
Dividend Yield
= Dividends Declared per Share / Market Price per Share
(%)
Rate of return a shareholder earned from dividends as % of market price
+ (but - if seeking price appreciation)
Profitability ratio
Basic Earnings per Share (EPS)
= (Net Income - Preferred Dividends) / Weighted Average # of Common Shares
($)
Net income earned on each common share
NOT COMPARABLE between companies
+
Profitability ratio
Price-Earnings Ratio
(P-E ratio)
= Market Price per Share / Basic Earnings per Share
(Times)
Relationship between market price & earnings per share.
Indicate investors’ expectation of profitability
+
Profitability ratio
Unit of Ratios
= $
- Working Capital
- Free Cash Flow
- Basic EPS
WFB
Unit of Ratios
= :1
Current Ratio
Unit of Ratios
= Days
- Days in Inventory
- Average Collection Period
DA
Unit of Ratios
= Times
- Inventory Turnover
- Receivables Turnover
- Times Interest Earned
- Asset Turnover
- Price-Earnings Ratio
PATRI
PE ratio & turnovers
Unit of Ratios
= %
- Debt to Total Assets
- Gross Profit Margin
- Profit Margin
- Return on Assets
- Return on Common Shareholders’ Equity
- Payout Ratio
- Dividend Yield
G-PDPRRPD
Life-Cycle of Corporate
-
Introductory
-$ Net loss -
Growth
$ Operating
$$ Investing
(covered by F)
$$$ Finance
$ Dividend -
Maturity
$$$$ Operating
$$$ Investing
(covered by O)
$$$$ Finance
$$ Dividend -
Decline
$ Operating
$ Investing
(sold to pay F)
$ Finance
? Dividend
Ratios that Lower is desired
- Days in Inventory
- Average Collection Period
- Debt to Total Assets (or Equity)
