FAR Ratio analysis

Question 1

What are the liquidity ratios

Answer 1

These ratios measure the ST risk of distress. The bigger the spread, the higher the ratio - lower the risk

1. Current Ratio
2. Quick Ratio

Question 2

Debt to Equity

Answer 2

D/E = Total Liabilities/Total Equity

• It is a measure of solvency (looking at capital structure)
• LT Risk

Question 3

Times interest earned (Interest coverage ratio)

Answer 3

EBIT/Interest Expense

• Measures of LT risk
• Ability to pay interest “coverage” ratio
• As spread increases, risk increases

Question 4

Inventory Turnover/ Days in inventory

Answer 4

• Inventory T/O =COGS/Av. Inventory
• Days in inventory = Ending Inventory/COGs x 365

Cash convertion cycle

• Ability to generate cash core
• CCC <= standard (good news)

Question 5

Account receivable T/O / Days Sales in AR

Answer 5

AR Turnover = Sales (net)/ Av. AR (net)

Days sales in AR = Ending AR/Sales (Net) x 365
(Sales/365 = av. daily
sales)
- Dependent on credit policy -Lax days to collect
increases # of days
-Strict days to collect
decreases #of days

Question 6

AP Turnover / Days of Payables Outstanding

Answer 6

AP Turnover = COGS/Av. AP

Days of Payables outstanding =Ending AP/COGS x 365

Stretch it out - take full adv. of int free grace period

Question 7

Cash Conversion Cycle

Answer 7

Days in inventory + Dales in Sales in AR - Days of payables outstanding

Question 8

Net Profit Margin

Answer 8

Net income/Sales (net)

- Measure of performance
- Higher the better
- Heavily dependent on competition

Question 9

Asset T/O

Answer 9

Asset T/O = Sales (net)/Av. total assets

• Measure of mgt
• Turn assets into sales (probable future economic benefits)

Question 10

return on Assets

Answer 10

ROA = Net Income/Av. total asset

Measure of Performance
Higher the better

Question 11

Return on Equity

Answer 11

ROE = Net Income/Av. total Equity

Return to stockholder (assume most risk)

Question 12

Operating CF Ratio

Answer 12

Operating CF Ratio = CF from Operations/CL

• A coverage ratio
• Measure of ST risk ie can you pay CL with cash generated from CY operations
  The bigger the spread btw the numerator and the denominator, the lower the risk