Equation Uses Flashcards
What is the current ratio used for?
Liquidity ratio
Estimate of the solvency of a company
Determines whether the assets recoverable within 1 yr is sufficient to cover liabilities due within 1 yr
(Eg. 2.5x means co. can survive debt 2.5 times)
Current Assets / Current Liabilities
What is the Quick Ratio used for?
Liquidity ratio
Adaption of current ratio, stripping out inventory (which is illiquid) to look a solvency of a company
Considered more pure measure. (Eg. 1.75x means company can service debt 1.75 times)
Current assets - inventory / current liabilities
What is the use of the Financial Gearing Ratio?
Gearing ratio
Assessing gearing/amount of debt within the company.
The higher the proportion of debt to equity a company has, the greater risk to shareholder dividends. (Eg. 93%)
Interest - Bearing Debt / Equity
What is the use of Net Asset Turnover ratio?
Working the assets
Asset turnover looks at the intensity with which managers are utilising assets in generating turnover
Turnover/Capital employed
What is the use of the Price/Earnings Ratio?
Valuation metric
Low P/E indicates a low share price, higher risk company (or undervalued)
High P/E indicates a high share price, lower risk company (or overvalued)
MPS / EPS
Define revenue
The total amount of income generated by the sale of goods or services
Define turnover
Amount earned by trading goods and services
What is Gross Profit Margin used for?
Cost efficiency
High gross profit margin indicates good cost efficiency in the purchasing/ production functions of the business
Gross Profit / Revenue
What is the Interest Cover ratio used for?
Gearing ratio
How many times a company could have paid its interest from this years PBIT (Profit before interest & tax)
PBIT/ Interest Expense
What is the Equity Multiplier Ratio used for?
Gearing ratio
Expresses how many times bigger the company has come due to borrowing (as opposed to wholly equity financed)
Total Assets / Equity
Define capital employed
Capital + reserves + interest bearing debt
What is Modified Duration?
Measure of the sensitivity of a bond’s price to changes in yield/interest rates
Low coupon/low yield bonds have higher modified duration
Macaulay Duration/ 1+Current Yield
What is the use of the Operational Gearing Ratio?
Similar to Financial Gearing, however it looks at reliance on fixed costs rather than borrowing (eg, rent, salaries)
Firms with higher fixed costs have high Operational Gearing and therefore have greater variation in their profits due to changes in output.
Sales Revenue - Variable Costs / Profit before tax
