Chapters 11-12: Statement Of Cash Flows, Financial Statement Analysis

Question 1

Gross Profit Ratio

Answer 1

Gross Profit
———————
Net Sales

• profitability Ratio
• Portion of each dollar of sales above Cost of goods sold

Question 2

Profit Margin

Answer 2

Net Income
——————-
Net Sales

• Profitability Ratio
• Income earned on each dollar of sales

Question 3

Return on Assets (ROA)

Answer 3

Net Income
————————————-
Average Total Assets

• Profitability Ratio
• Income earned on each dollar invested in assets

Question 4

Return on Equity (ROE)

Answer 4

Net Income
——————————————
Average stockholders’ equity

• Profitability Ratio
• Income earned on each dollar of stockholders’ equity

Question 5

Current Ratio

Answer 5

Current Assets
—————————-
Current liabilities

• Liquidity Ratio
• Do you have sufficient current assets to pay current liabilities when they become due
• COVERAGE (think umbrella)

Question 6

Acid Test Ratio

Quick Ratio

Answer 6

Cash + Current Investments + Accounts Receivable
_____________________________________________________
Current Liabilities

• Liquidity Ratio
• A more conservative measure of COVERAGE
• Similar to the Current Ratio, but removes assets that can not be disposed of quickly for cash
• Current Investments< 90 day maturity

Question 7

Receivables Turnover Ratio

Answer 7

Net Credit Sales
———————————————
Average Accounts Receivable

• Liquidity Ratio
• Number of times a company collects accounts receivable balance in a given year (or period)

Question 8

Average Collection Period

Answer 8

365 Days
—————————————-
Receivables Turnover Ratio

• Liquidity Ratio
• Average number of DAYS an accounts receivable balance is outstanding

Question 9

Inventory Turnover Ratio

Answer 9

Cost Of Goods Sold
—————————————
Average Inventory

• Liquidity Ratio
• Number of Times a company sells its entire inventory per year (or period)

Question 10

Average Days In Inventory

Answer 10

365 Days
—————————————-
Inventory Turnover Ratio

*Average number of Days inventory is held by company

Question 11

Working Capital

Answer 11

Current Assets — Current Liabilities

• Liquidity Measure (NOT a Ratio)
• How much money is left to work with after paying current liabilities
• Current liabilities are due within the next 365 days

Question 12

Debt To Equity Ratio

Answer 12

Total Liabilities
——————————-
Stockholders’ Equity

• Solvency Ratio (ability to pay current AND Longterm liabilities)
• Measures company’s Debt Burden and Capital Structure
• The higher the Debt To Equity Ratio, the higher the risk of bankruptcy

Question 13

Free Cash Flow

Answer 13

Net Cash From Operating Activities — Cash Payments For Planned Investments — Cash Dividends Paid Out

• Solvency Measure (NOT a Ratio)
• Cash Available to grow a business

Question 14

Times Interest Earned Ratio

Answer 14

Net Income + Interest Expense + Tax Expense
———————————————————————
Interest Expense

• Solvency Ratio
• How many times more Income does a company have to pay Interest Expense on Longterm liabilities
• Amount available to pay interest (DEBT SERVICE)

Question 15

Asset Turnover Ratio

Answer 15

Net Sales
———————————-
Average Total Assets

• Productivity Ratio
• Sales per dollar of Assets invested
• Increase this Ratio by Lowering price of products for high sales volume

Question 16

Return On Investment (ROI)

Answer 16

Net Operating Income
—————————————
Average Operating Assets

• Productivity Ratio
• Is the Company using assets to generate a profit

Question 17

Dividend Yield

Answer 17

Dividends Per Share
———————————-
Stock Price

• Market Measure Ratio (How Investors feel about a company)
• Measures Investment Income (looking for high dividend payout %)

Question 18

Earnings Per Share (EPS)

Answer 18

Net Income (— Preferred Dividends)
———————————————————————
Average Number Of Common Stock Outstanding

• Market Measure Ratio
• Net Income per share of common stock
• Use: Comparing earnings performance for the SAME COMPANY over time
• Not for comparing two different companies because of the difference in Number of shares outstanding

Question 19

Price To Earnings Ratio (P/E)

Answer 19

Stock Price
————————————
Earnings Per Share (EPS)

• Market Measure Ratio
• How is the Stock trading relative to its earnings
• High P/E Ratio = Hot stock (high stock price)
• Common P/E Range: 15-20
• Use: find Growth Stocks (stock price high, Current earnings low) and Value Stocks ( Stock Price Low, Current Earnings High)