Financial Ratios Flashcards
Activity ratios
“Efficiency”: collecting accounts receivables, inventory turnover. How effectively assets or resources are being used
Inventory turnover Payables turnover Receivables turnover Days of sales outstanding Payables turnover Number of days of payables Working capital turnover Fixed asset turnover Total asset turnover
Liquidity ratios
Ability to meet short term obligations
Current ratio Quick ratio Cash ratio Defensive interval ratio Cash conversion cycle
Solvency ratios
Ability to meet long term obligations. Aka leverage ratios or LTD ratio
Debt to assets Debt to capital Debt to equity Financial leverage Interest coverage Fixed charge coverage
Profitability ratios
Ability to generate profit
Gross profit margin Operating profit margin Pre tax margin Net profit margin Operating ROA ROA Return on total capital ROE Return on common equity
Valuation ratios
Quality of an asset or flow, ie earnings, associated with ownership, ie per share
Inventory turnover
Cogs / average inventory
Days of inventory on hand (DOH)
365 / inventory turnover
Inventory turnover: COGS/ avg inventory
Receivables turnover
Revenue/ average accounts receivables
Days of sales outstanding (DSO)
365 / receivables turnover
Receivables turnover: revenue/ average accounts receivables
Payables turnover
Purchases / accounts payable
Purchases: COGS + ending inventory - beginning inventory
Purchases
COGS + ending inventory - beginning inventory
Number of days of payables
365 / payables turnover
Payables turnover: purchases / average accounts payable
Working capital
Current assets - current liabilities
Working capital turnover
Revenues / average working capital
high is better
Fixed asset turnover
Revenue/ net fixed assets
Current ratio
Current assets / current liabilities
Quick ratio
Cash + marketable securities + accounts receivables
/ current liabilities
Cash ratio
Cash + marketable securities
/ current liabilities
Defensive interval ratio
Cash + marketable securities + AR
/ Daily cash expense
Daily cash expense: ( sum expenses) - noncash/ 365
- higher is better
Cash conversion cycle
DOH + DSO - number of days payable
lower is better
Debt to assets
Total debt / total assets
Lower is better
Debt to capital
Total debt / total debt + sh.equity
Lower is better
Debt to equity
Total debt / total sh.equity
Lower is better
Financial leverage
Average total assets / average total equity
Higher is better
Interest coverage
EBIT / interest payments
Higher is better
Fixed charge coverage
EBIT + lease payments
/ interest payments + lease payments
higher is better
Gross profit margin
Gross profit / sales
Higher is better
Operating profit margin
Operating profit / sales
Higher is better
Pre tax margin
EBIT / sales
Higher is better
Net profit margin
Net income / sales
Higher is better
Operating ROA
Operating income / average total assets
Higher is better
numerator: either EBIT or NI
ROA
Net income / average total assets
Higher is better
numerator: either EBIT or NI
Return to total capital
EBIT / total debt + equity
Higher is better
numerator: either EBIT or NI
ROE
Net income / average total equity
Higher is better
Return on common equity
(Net income - pref dividends) / average common equity
Higher is better
Debt to assets
total debt / total assets
higher is worse
debt to capital
total debt / total debt + sh.e
higer is worse
debt to equity
total debt / total sh.e
financial leverage
avg total assets / avg total equity
Interset coverage
EBIT / interest payments
high is good
Fixed charge coverage
EBIT + lease payments / interest payments + lease payments
In general, high debt (leverage) ratios imply ____
In general, high coverage ratios imply_____
- high debt ratios imply a high level of debt, high risk, and low solvency
- high coverage ratios are better and indicates high income relative to interest payments
ROE and its expanded form
ROE = Net income / E
= ROA x Financial leverage
= (net income / assets) * (assets / equity)
The traditional DuPont equation:
ROE
= net profit margin * asset turnover * leverage ratio
= (net income / sales) * (sales / assets) * (assets / equity)
= NI/S * S/T.A. * A/E
The extended DuPont equation:
ROE =
tax burden * interest burden * EBIT margin * asset turnover * financial leverage
= (NI / EBT) * (EBT / EBIT) * (EBIT/S) * (S/A) * (A/E)
Price to earnings ratio
P/E ratio
= price per share / earnings per share
- a valuation measure
- prone to earnings manipulation, non-recurring earnings may distort
Price to cash flow
P / CF
price per share / cash flow per share
- less prone to manipulation than P/E
Price to sales
P/S
price per share / sales per share
- used when net income is not positive
Price to book value
Price per share / book value per share
- a value > 1 means future rate of return is higher than the required rate of return
Dividend ratios (3):
- dividend payout ratio
- retention rate
- sustainable growth rate
Dividend payout ratio
= dividend / earnings
- measures the percentage of earnings a company pays out as dividends to equity shareholders
Retention rate
= 1 - payout ratio
- measures the percentage of earnings a company retains
Sustainable growth rate
= retention rate * ROE
- measures how much growth a company is able to finance from its internally generated funds.
Credit analysis ratios (7)
- EBITDA interest coverage
- FFO (funds from operations) to debt
- Free operating cash flow to debt
- EBIT margin
- EBITDA margin
- Debt to EBITDA
- Return on capital
EBITDA interest coverage ratio
= EBITDA / Gross interest
- a higher value implies good credit quality
FFO to debt ratio
= funds from operations / total debt
- a higher value implies good credit quality
Free operating cash flow to debt ratio
= CFO - capex / total debt
- a higher value implies good credit quality
EBIT margin ratio
= EBIT / total revenue
- a higher value implies good credit quality
EBITDA margin
= EBITDA / total revenue
- a higher value implies good credit quality
Debt to EBITDA ratio
= total debt / EBITDA
- lower implies good credit quality
Return on capital ratio
= EBIT / average beginning-of-yr and end-of-yr capital
- a higher value implies good credit quality
