Finance and Accounting Flashcards
EBITDA
EBITDA stands for earnings before interest, taxes, depreciation, and amortization, and its margins reflect a firm’s short-term operational efficiency. EBITDA is useful when comparing companies with different capital investment, debt, and tax profiles. Quarterly earnings press releases often cite EBITDA.
Return on Equity (ROE)
Net Income/Total Equity
Working Capital Ratio
The working capital ratio is calculated by dividing current assets by current liabilities:
current assets / current liabilities = working capital ratio.
Used to measure liquidity.
Ratio of 1 can be cause for concern
Ratio of 2+ is good, but could mean too much cash on hand
Quick Ratio
The quick ratio is also called the acid test. It’s another measure of liquidity. It represents a company’s ability to pay current liabilities with assets that can be converted to cash quickly.
Current assets - inventory prepaid expenses / current liabilities
A quick ratio of less than 1 can indicate that there aren’t enough liquid assets to pay short-term liabilities. The company may have to raise capital or take other actions. On the other hand, it may be a temporary situation.
Earnings Per Share (EPS)
When buying a stock, you participate in the future earnings or the risk of loss of the company. Earnings per share (EPS) is a measure of the profitability of a company. Investors use it to gain an understanding of company value.
net income / weighted average = earnings per share
Price-Earnings Ratio (P/E)
Called P/E for short, this ratio is used by investors to determine a stock’s potential for growth. It reflects how much they would pay to receive $1 of earnings. It’s often used to compare the potential value of a selection of stocks.
current stock price / earning- per-share = price-earnings ratio.
Debt-to-Equity Ratio
The debt-to-equity (D/E) ratio measures how much a company is funding its operations using borrowed money. It can indicate whether shareholder equity can cover all debts, if necessary. Investors often use it to compare the leverage used by different companies in the same industry. This can help them to determine which might be a lower-risk investment.
total liabilities / total shareholders’ equity = debt-to-equity ratio
Return on Equity (ROE)
Return on equity (ROE) measures profitability and how effectively a company uses shareholder money to make a profit. ROE is expressed as a percentage of common stock shareholders.
net income (expenses and taxes before paying common share dividends and after paying preferred share dividends) / total shareholders’ equity = return on equity
You might consider a good ROE to be one that increases steadily over time. This could indicate that a company does a good job using shareholder funds to increase profits. That can in turn increase shareholder value.
