Chapter 4 - Ratio Analysis Flashcards
Accounts Receivable turnover
Credit sales (or revenue) / average Accounts Receivable
Inventory turnover ratio
Cost of sales / Average inventory
Inventory holding period
operating days / inventory turnover ratio
Fixed asset turnover
revenue / average fixed assets
working capital turnover
revenue / average working capital
What does AR turnover tell you?
The average number of times the company is paid
What does inventory turnover ratio tell you?
How many times the inventory has to be restocked. If ratio is 10, you have to restock 10 times per year
What does fixed asset turnover tell you?
the revenue generated by every $1 of fixed assets
What does working capital turnover tell you?
High W.C.: ineffective use of funds; low W.C.: liquidity problem if sales decline
Current ratio
current assets/current liabilities
Quick ratio
Quick assets/current liabilities
what are quick assets?
the sum of the assets BEFORE inventory
What is ratio analysis?
Comparing the ratios against benchmarks
How do you define a ratio?
The comparison and relationship of two figures
Explain the four basis of comparison
Industry average: easy access, quick idea, less valuable if it covers a large geographical area
Competitors: similar, difficult to obtain/explain difference
Past performance: except in a rapidly changing environment
Predetermined standards: consider external and internal factors
Ratio analysis benefits
Compare firms of different sizes
Evaluate balance sheets in conjunction with income statements
What are the five ratio categories? Explain each.
Liquidity - current obligations
Solvency - long-term obligations
Profitability - mgmt effectiveness in producing profits
Activity - mgmt effectiveness in managing assets
Operating - F&B, Lodging - operating efficiency
Working capital equation
Current assets - Current liability
Solvency ratios
Total liabilities to total assets
Total liabilities to total equity
Number of times interest earned = EBIT / interest expense (no EBIT: use operating income)
What are the profitability ratios
Profit margin = net income / sales revenue [not gross margin]
ROA = net income / average total assets
ROE = net income / average equity
