Chapter 3 formulas

Question 1

Profit margin (profitability)

Answer 1

= Net income/Sales

-High profit margin is favorable

Question 2

Return on assets (profitibility)

Answer 2

= Net income/ Total assets

-High ROA is favorable

Question 3

Return on Equity (profitibility)

Answer 3

= Net Income/ Shareholder’s equity

-a high ROE is favorable (profitability relative to shareholders’ equity)

Question 4

Receivables turnover (Asset utilization)

Answer 4

= Net credit sales/ Average accounts receivable

• a high receivables turnover is favorable ( collect payments from customers )

Question 5

Average collection period (Asset utilization)

Answer 5

= 365/ receivables turnover

• a low collection period is favorable ( amount of time it takes to receive payment)

Question 6

Inventory turnover (Asset utilization)

Answer 6

= COGS/ Average Inventory

• a high inventory turnover is favorable

Question 7

Capital Asset turnover (Asset utilization)

Answer 7

= Sales/ Net capital assets

High capital asset turnover is favorable ( utilizes capital assets to generate revenue- PPE)

Question 8

Total asset turnover (Asset utilization)

Answer 8

= sales/ total assets

-high figure is favorable

Question 9

Current ratio (liquidity)

Answer 9

= current assets/ Current liabilities

-high number is favorable (ability to cover short-term liabilities- be weary of inventory)

Question 10

Quick ratio (liquidity)

Answer 10

= Current assets-Inventory/ current liabilities

-A high number is favorable (above 1= is high)

Question 11

Debt to total assets (Debt utilization)

Answer 11

= total debts/ total assets

• the low number is favorable ( amount of assets that are financed by debt)

Question 12

Times interest earned (debt utilization)

Answer 12

=EBIT/ interest expense

• the high number is favored ( ability to meet interest obligations)