chapter 3 Flashcards
common-size balance sheet
all accounts are a percent of total assets
common-sized income statement
all line items = percent of sales or revenue
standardized statements are useful for
- comparing financial information year-to-year
- comparing companies of different sizes, especially within the same industry
ratio analysis
allows for better comparison through time or between companies
one problem with ratios is that
different sources frequently don’t compute them in the same way
categories of financial ratios
- liquidity ratios
- financial leverage ratios
- asset management
- profitability ratios
- market value ratios
three short-term solvency, or liquidity, ratios
current ratio, quick ratio, cash ratio
current ratio =
current assets / current liabilities
quick ratio =
(current assets - inventory) / current liabilities
cash ratio =
cash / current liabilities
short-term solvency ratios
provide info about liquidity and ability of firm to pay bills over short run (current assets + liabilities)
least liquid current asset
inventory
long-term solvency (financial leverage) ratios
addresses firm’s long-term ability to meet its obligations or financial leverage
5 long-term solvency ratios
total debt ratio, debt equity ratio, equity multiplier, times interest earned ratio, cash coverage ratio
total debt ratio =
(total assets - total equity) / total assets
debt equity ratio =
total debt/total equity
equity multiplier =
total assets / total equity
if there is .28 in debt for 1 dollar in assets, the amount of equity is
.72
equity multiplier = 1 +
debt equity ratio
times interest earned ratio =
EBIT / interest
problem with times interest earned ratio
it’s based on EBIT, which is not really a measure of cash available to pay interest
cash coverage ratio =
(EBIT + depreciation) / interest
3 asset utilization ratios
inventory turnover, receivables turnover, total asset turnover
inventory turnover =
cogs / inventory
