Chapter 16 Ratios Flashcards
What are the Liquidity Ratios?
1) Working Capital
2) Current Ratio
3) Acid-Test Ratio
What is the formula for Working Capital?
Current Assets- Current Liabilities
What is the significance of the working capital ratio?
Measures the company’s ability to repay current liabilities using only current assets.
What is the formula for current ratio?
Current Assets/Current Liabilities
What is the significance of current ratio?
Test of short-term debt-paying ability.
What is the formula for the acid-test ratio?
(Cash + Market Securities + Accounts Receivable)/Current Liabilities
What is the significance of the acid-test ratio?
Test of short-term debt-paying ability without having to rely on inventory.
What are the Asset Management Ratios?
1) Accounts Receivable Turnover
2) Average Collection Period
3) Inventory Turnover
4) Average Sale Period
5) Operating Cycle
6) Total Asset Turnover
What is the formula for the accounts receivable turnover?
Sales on Account/Average Accounts Receivable Balance
What is the significance of the accounts receivable turnover?
Measures how many times a company’s accounts receivable have been turned into cash during the year.
What is the formula for the average collection period?
365 Days/Accounts Receivable Turnover
What is the significance of the average collection period?
Measures the average number of days taken to collect an accounts receivable.
What is the formula for inventory turnover?
Cost of Goods Sold/Average Inventory Balance
What is the significance of inventory turnover?
Measures how many times a company’s inventory has been sold during the year.
What is the formula for the average sale period?
365 Days/Inventory Turnover
What is the significance of inventory turnover?
Measures the average number of days taken to sell the inventory one time.
What is the operating cycle formula?
Average Sale Period + Average Collection Period
What is the significance of the operating cycle?
Measures the elapsed time from when inventory is received from suppliers to when cash is received from customers.
What is the formula for total asset turnover?
Sales/Average Total Assets
What is the significance of the total assets turnover?
Measures how efficiently assets are being used to generate sales.
What are the Debt Management Ratios?
1) Times Interest Earned Ratio
2) Debt-to-Equity Ratio
3) Equity Multiplier
What is the formula for the times interest earned ratio?
Earnings before interest expense and income taxes/Interest expense
What is the significance of the times interest earned ratio?
Measures the company’s ability to make interest payments.
What is the formula for the debt-to-equity ratio?
Total Liabilities/Stockholder’s Equity
What is the significance of the debt-to-equity ratio?
Measures the amount of assets being provided by creditors for each dollar of assets being provided by the stockholders.
What is the formula for the equity multiplier?
Average Total Assets/Average Stockholder’s Equity
What is the significance of the equity multiplier?
Measures the portion of a company’s assets funded by equity.
What are the Profitability Ratios?
1) Gross Margin Percentage
2) Net Profit Margin Percentage
3) Return on Total Assets
4) Return on Equity
What is the formula for the gross margin percentage?
Gross Margin/Sales
What is the significance of the gross margin percentage?
Measuers profitablity before selling and administrative expenses.
What is the formula for the net profit margin percentage?
Net Income/Sales
What is the significance of the net profit margin percentage?
A broad measure of profitability.
What is the formula for return on total assets?
(Net Income + [Interest Expense x (1- Tax Rate)])/Average Total Assets
What is the significance on the return on total assets?
Measures how well assets have been employed by management.
What is the formula for return on equity?
Net Income/Average Stockholders’ Equity
What is the significance of the return on equity?
When compared to the return on total assets, measures the extent to which financial leverage is working for or against common stockholders.
What are the Market Performance Ratios?
1) Earnings per Share
2) Price-Earnings Ratio
3) Dividend Payout Ratio
4) Dividend Yield Ratio
5) Book Value Per Share
What is the formula for Earnings Per Share?
Net Income/Average Number of Common Shares Outstanding
What is the significance of the earnings per share?
Affects the market price per share, as reflected int he price-earnings ratio.
What is the formula for the price-earnings ratio?
Market price per share/Earnings per share.
What is the significance of the price-earnings ratio?
An index of whether a stock is relatively cheap or relatively expensive in relation to current earnings.
What is the formula for the dividend payout ratio?
Dividends per share/Earnings per share.
What is the significance of the dividend payout ratio?
An index showing whether a company pays out most of its earnings in dividends or reinvests the earnings internally.
What is the formula for the dividend yield ratio?
Dividends per share/Market Price per Share
What is the significance of the dividend yield ratio?
Shows the return in terms of cash dividends being provided by a stock.
What is the formula for Book Value per Share
Total Stockholders’ Equity/Number of Common Shares Outstanding
What is the significance of the book value per share?
Measures the amount that would be distributed to common stockholders if all assets were sold at their balance sheet carrying amounts and if all creditors were paid off.
