Equations and their nature Flashcards
Accounts payable turnover ratio
Liquidity
Acid test or quick ratio
Liquidity
Should be, at least 1:1
Indicates the business’s ability to meet its immediate short-term financial obligations without having to sell inventories.
Cash generating power ratio
Cash flow
Current ratio
Liquidity
Generally a current ratio of 2:1 indicates a sound financial position for a firm. That is, the firm should have double the amount of current assets to cover it’s current liabilities.
Dividend per ordinary share
NOT on formala sheet
Profitability
(cents_ how much profit in comparison to equity
Use this calculation to share profits with its shareholders.
DPS can indicate how profitable a company is over a fiscal period and it can tell an investor about the company’s past financial health and current financial stability.
Debt to equity ratio
Stability
Can be high depending on state of net profit
The debt to equity ratio is a measure of a company’s financial leverage, and it represents the amount of debt in comparison to the equity being used to finance a company’s assets.
A higher debt ratio makes it more difficult to borrow money
Debt ratio
Stability
This, plus the equity ratio, should equal to 100%
All assets of the business are funded either by debt or by equity.
Earnings per share ratio
Profitability
Recorded in cents.
The higher the EPS figure, the better it is. A higher EPS is a sign of (1) higher earnings, (2) strong financial position, and therefore a reliable company for investors to invest their money.
A consistent improvement in the EPS figure, year after year, is an indication of continuos improvement in the earning power of the company.
EBITDA margin ratio
Profitability
Earnings before… interest tax, depreciation and ammortisation
Shows how much cash a company generates for each dollar of sales revenue, before accounting for interest, taxes, and amortisation & depreciation.
Gross profit ratio
Profitability
Shows supplier, pricing strategy, advertising
Gross profit per $ of sales. Should be sufficient to cover all expenses and provide profit. Needs to continuously improve from year to year.
Equity ratio
Stability
All assets of the business are funded either by debt or by equity.
Since the interest on a debt must be paid regardless of a businesses profitability.
Too much debt may compromise cashflow.
The closer a firm’s ratio result is to 100%, the more assets it has financed with stock rather than debt.
Long-term debt coverage ratio
Cash Flow
Gearing ratio
Stability
(Short term + Long term obligations + overdrafts) = total liabilities
Measures the proportion of assets invested in a business that are financed by long term borrowing compared to its share capital, (= money in shares).
Companies with high debts are ‘highly geared’, and could face financial difficulties if their profits fall.
Net profit ratio
Profitability
Shows additional expenses.
The overall profitability of the business. Shows efficient management.
Price-earnings ratio
Profitability
Recorded in cents.
The P/E ratio is the price an investor is paying for $1 of a company’s earnings or profit.
[HIGH] - means a company is a growth company and/or financially strong
[LOW] - means a company is stable and not experiencing substantial growth. Low demand for shares.
Operating cash flow ratio
Cash Flow
Times interest earned ratio
(times, not a percentage)
Stability
How well you can pay off interest
How much of the current company profit before the company pays off interest expense.
The times interest ratio indicates how many times a company could pay the interest with its before tax income. A larger ratio is considered more favourable.
Shareholder equity ratio
Liquidity
How much of the company’s assets have been generated by issuing equity shares rather than taking on debt.
Return on owner’s equity
Profitability
Below 10% is generally considered poor.
ROE shows how much profit a company earned in comparison to the total amounts of shareholder equity. It’s what shareholders “own” as a percentage of the net profit.
It measures performance and generally the higher the better.
These ratios try to guage future expectations.
Rate of turnover of accounts receivable
Liquidity
Measures the effectiveness of a firm’s credit policy and how efficiently it collects debts.
It measures how many days it takes for accounts receivables to be converted into cash or how quickly they pay their accounts.
Rate of return on total assets
Profitability
Profit before taxes and cost of debt (interest)
How efficiently is the company using its assets to generate profit. Because all assets are acquired either by debt or equity, investors disregard the cost of the debt and therefore interest is added back in.
Rate of turnover of inventories
Liquidity
Dividend yield ratio
Profitability
(how much paid out is in dividends)
Relevant to its stock price. 4-6% is generally considered good (depending on industry benchmark).
If investors are only looking for dividend income, a low percentage might not be enough for them to invest.
