Financial Ratios Flashcards by Wes L

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

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Liquidity ratios

Ability to meet short term obligations

Current ratio
Quick ratio
Cash ratio
Defensive interval ratio
Cash conversion cycle

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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

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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

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Valuation ratios

Quality of an asset or flow, ie earnings, associated with ownership, ie per share

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Inventory turnover

Cogs / average inventory

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Days of inventory on hand (DOH)

365 / inventory turnover

Inventory turnover: COGS/ avg inventory

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Receivables turnover

Revenue/ average accounts receivables

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Days of sales outstanding (DSO)

365 / receivables turnover

Receivables turnover: revenue/ average accounts receivables

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Payables turnover

Purchases / accounts payable

Purchases: COGS + ending inventory - beginning inventory

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Purchases

COGS + ending inventory - beginning inventory

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Number of days of payables

365 / payables turnover

Payables turnover: purchases / average accounts payable

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Working capital

Current assets - current liabilities

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Working capital turnover

Revenues / average working capital

high is better

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Fixed asset turnover

Revenue/ net fixed assets

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Current ratio

Current assets / current liabilities

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Quick ratio

Cash + marketable securities + accounts receivables

/ current liabilities

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Cash ratio

Cash + marketable securities

/ current liabilities

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Defensive interval ratio

Cash + marketable securities + AR
/ Daily cash expense

Daily cash expense: ( sum expenses) - noncash/ 365

higher is better

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Cash conversion cycle

DOH + DSO - number of days payable

lower is better

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Debt to assets

Total debt / total assets

Lower is better

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Debt to capital

Total debt / total debt + sh.equity

Lower is better

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Debt to equity

Total debt / total sh.equity

Lower is better

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Financial leverage

Average total assets / average total equity

Higher is better

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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