Chapter 4: Ratio Analysis

Question 1

Formula: Capital Intensity

Answer 1

used to evaluate how much a business requires large investments (PPE)
Capital Intensity =
(Fixed Assets + Intangible Assets) \ Total Assets

Question 2

Common-sized income statement & balance sheet

Answer 2

Shows items as % of net revenue (I/S) & % of total assets (B/S)

Question 3

Percentage Change income statement & balance sheet

Answer 3

Shows change in items of IS as % of net revenue & % change of total assets (B/S)

Question 4

Net revenue formula

Answer 4

Net Revenue = Gross revenue - sales discount -sales returns

Question 5

profitability

Answer 5

relative success of a company’s operations; a measure of the extent to which accomplishment exceed effort

Question 6

asset management

Answer 6

effective utilization of a company’s revenue producing assets; a measure of management’s ability to effectively utilize a company’s assets to produce revenue

Question 7

solvency

Answer 7

the long term debt repayment ability of a company; a measure of a company’s long-term liquidity

Question 8

liquidity

Answer 8

short-term debt repayment ability of a company; a measure of a company’s cash position relative to currently maturing obligations

Question 9

leverage

Answer 9

the extend to which a company’s long-term capital structure includes debt financing; measure of company’s dependency on debt. Large debt = highly leveraged

Question 10

Formula: Rate of return generated by a business for its common shareholders

Answer 10

ROE = (NI - Preferred Stock Dividends)/ SE

Question 11

Formula: Rate of return generated by a company’s investment in assets from all sources

Answer 11

ROA = (NI + {1-Tax Rate}) / Total Assets

Question 12

Formula: Percentage of net income remaining from a dollar of sales after subtracting all expenses

Answer 12

ROS = (NI + {1-tax rate})/ Net Sales

Question 13

Formula: Percentage of income generated from sales after deducting the COGS

Answer 13

Gross Profit Margin Ratio = (Net Sales - COGS) / Net Sales

Question 14

Formula: # of sales/collection cycles experienced by a firm

Answer 14

Receivable turnover = Net Sales / AR

Question 15

Formula: # of days required to collect an outstanding AR

Answer 15

Receivable collection period = 365 / (Net Sales/AR)

Question 16

Formula: # of production/sales cycles experienced by a firm

Answer 16

Inventory turnover = COGS / Inventory

Question 17

Formula: # of days required to sell the inventory

Answer 17

Inventory on-hand period = 365 / (COGS/Inventory)

Question 18

Formula: Amount of sales generated from each dollar invested in assets

Answer 18

Asset turnover = Net Sales / Total Assets

Question 19

Formula: % of total assets held as highly liquid assets

Answer 19

Cash & Marketable Securities to Total Asets:

(Cash + Marketable Securities) \ Total Assets

Question 20

Formula: Amount of liquid assets available to pay short term liabilities

Answer 20

Quick Ratio:

(Cash + Marketable Securities + AR) \ Current Liabilities

Question 21

Formula: Amount of current assets available to service current liabilities

Answer 21

Current ratio: Current assets / Current Liabilities

Question 22

Formula: # of AP cycles experienced by a firm

Answer 22

Accounts payable turnover = COGS / AP

Question 23

Formula: # of days required to pay an outstanding account payable

Answer 23

Days Payable Period = 365/ (COGS/AP)

Question 24

Formula: % of total assets provided by creditors

Answer 24

Long-term debt to total assets:

(Long-term debt + Current Portion of Long-term debt)/ Total Assets

Question 25

Formula: Relative investment of long-term creditors versus shareholders in a business

Answer 25

Long-term debt to SE:

Long-term debt + Current Portion of Long-term debt)/SE

Question 26

Formula: Extent to which current operating income covers current debt service charges

Answer 26

Interest coverage ratio: (NIBT + Interest Expense) / Interest Expense

Question 27

Formula: Cash Collection Period

Answer 27

Inventory on hand period + Receivable collection period - day’s payable period

Question 28

What are three components of ROE?

Answer 28

ROS x AT x LEV

Question 29

What is the formula for sustainable growth rate?

Answer 29

SGR = ROE x Dividend retention rate

Question 30

What are limits of financial statement analysis?

Answer 30

Measurement of property valuation, conservative data estimates, differing accounting methods, biased managerial data & lack of timeliness (10K published 2 months later).