Financial Analysis Fundamentals Flashcards
Define / List Formula
Current Ratio
Current Asset / Current Liabilities
Measures the ability of a company to cover its short term’s obligations
Liqudity Ratio
General Rule of thumb is 2:1
Define / List Formula
Quick ratio (acid test ratio)
(Current assets – Inventory) / Current liabilities
Provides a more prudent measure of short-term liquidity recognizing that the inventory cannot always be readily converted into cash.
Liqudity Ratio
General Rule of thumb is 1:1
Define / List Formula
Working Capital
[Current assets – Current liabilities]
OR [Receivables + Inventory - Payables]
Represents the company’s operating inflow and outflow of cash.
Define / List Formula
Working Capital Funding Gap
Inventory Days - Payable Days + Receivable Days
The period of time between when the cash go in and when the cash go out of the company.
Define / List Formula
Gross Profit Margin
Gross Profit / Sales
Shows how much is spent on producing the good or service that is sold for every dollar of sales revenue.
Profitability Ratio
Define
Vertical Analysis
A method where we evaluate a component of revenue by taking it against total revenue for a given period. Doing this will allow us to see how much contribution each expense makes in proportion to revenue.
Define / List Formula
Accounts Receivable Turnover ratio
Sales / AR
Measures how effective the company’s credit policies are.
Efficiency Ratio
Define / List Formula
Accounts Payable Turnover ratio
Cost of sales / AP
Measures how effective the company is in paying its suppliers.
Efficiency Ratio
Define / List Formula
PP&E Turnover ratio
Sales / PP&E
Measures the sales a company is able to generate from its capital assets.
Efficiency Ratio
Define / List Formula
Debt to Equity ratio
Interest bearing liabilities [includes ST and LT debts] / Total shareholder’s equity
Calculates the weight of total debt and financial liabilities against shareholder’s equity.
Leverage Ratio
Define / List Formula
Debt to tangible net worth ratio
Interest bearing liabilities [includes ST and LT debts] / (Equity – Intangible assets)
Measures how many physical assets a company has. It represents the proceeds that could be available if the company were to be quickly sold.
Leverage Ratio
Define / List Formula
Total liabilities to equity ratio
Total liabilities / Equity
Is used in conjunction with the debt to equity ratio to determine the impact operational liabilities have on the funding of the business.
Leverage Ratio
Define / List Formula
Total assets to equity ratio
Total assets / Equity
Shows the relationship of total assets to the portion owned by shareholders. It is used to measure the leverage relative to assets.
Leverage Ratio
Define / List Formula
Debt to EBITDA ratio
Interest bearing liabilities [includes ST and LT debts] / EBITDA
Measures the amount of leverage relative to EBITDA. This ratio reflects the cash available to pay back the debt.
Leverage Ratio
Define / List Formula
Inventory Days ratio
(Inventory x 365) / Cost of sales
Indicates the average number of days goods remain in inventory before being sold.
Efficiency Ratio
