Financial Ratios Flashcards
What is the CURRENT RATIO formula and what part of analysis is it?
CA/CL= ( ) to 1
Liquidity Analysis
What does the CURRENT RATIO tell us, and how does it work?
- Current Ratio measures a companies ability to pay off current or short term liabilities, with its current, or short-term, assets, such as cash, inventory, and receivables.
- A ratio under 1.00 indicates that short term liabilities are > then a company’s assets expected to be turned to cash within the year. Company’s with very high ratio could mean they are not utilizing there assets efficiently
What is the QUICK RATIO formula and what part of analysis is it?
(CA - INV)/CL = ( ) to 1
Liquidity Analysis
What is the DEBT RATIO formula and what part of analysis is it?
Total Liabilities / Total Assets
Debt Analysis
What does the DEBT RATIO tell us, and how does it work?
- The higher the debt ratio, the more leveraged a company is, implying greater financial risk.
- Depends on industry whether a ratio is good or bad (some industry carry high ratios on average)
- Below 1.0 would be seen as relatively safe, whereas ratios of 2.0 or higher would be considered risky.
What is the Times Interest Earned (TIE) formula and what part of analysis is it?
EBIT / Int. Expense =
Debt Analysis
What does the TIE tell us, and how does it work?
- The times interest earned (TIE) ratio is a measure of a company’s ability to meet its debt obligations based on its current income.
- It gives us more of a scope of a company’s financial freedom
(Companies that have consistent earnings, like utilities, tend to borrow more because they are good credit risks.)
What is the INVENTORY TURNOVER formula and what part of analysis is it?
COGS / Inventory =
Activity Analysis
What does the INVENTORY TURNOVER tell us, and how does it work?
- Inventory turnover is a financial ratio showing how many times a company has sold and replaced inventory during a given period
- low turnover implies weak sales and possibly excess inventory
- high ratio, on the other hand, implies either strong sales or insufficient inventory.
- Sometimes a low inventory turnover rate is a good thing, such as when prices are expected to rise (inventory pre-positioned to meet fast-rising demand) or when shortages are anticipated.
What is the RECEIVABLE TURNOVER formula and what part of analysis is it?
SALES / RECEIVABLES
ACTIVITY ANALYSIS
What does the RECEIVABLE TURNOVER tell us, and how does it work?
- accounting measure used to quantify a company’s effectiveness in collecting its accounts receivable, or the money owed by customers or clients
- A high receivables turnover ratio may indicate that a company’s collection of accounts receivable is efficient
- low receivables turnover ratio could be the result of inefficient collection, inadequate credit policies
What is the AVERAGE COLLECTION PERIOD (ACP) formula and what part of analysis is it?
REC / (sales/365 or what ever period of time) =
Activity analysis
What does the AVERAGE COLLECTION PERIOD (ACP) tell us, and how does it work?
- The term average collection period refers to the amount of time it takes for a business to receive payments owed by its clients in terms of accounts receivable
- A low average collection period indicates that an organization collects payments faster.
What is the AVERAGE PAYMENT PERIOD (APP) formula and what part of analysis is it?
Acct Pay / (sales/365 or what ever period of time) =
Activity analysis
What does the AVERAGE PAYMENT PERIOD (APP) tell us, and how does it work?
- The term average collection period refers to the amount of time it takes for a business to receive payments owed by its clients in terms of accounts receivable
- A low average collection period indicates that an organization collects payments faster.
What is the FIXED ASSET TURNOVER (FATO) formula and what part of analysis is it?
What does the FIXED ASSET TURNOVER (FATO) tell us, and how does it work?
Sales / Net Fixed Assets =
(activity analysis)
- measures a company’s ability to generate net sales from its fixed-asset investments, namely property, plant, and equipment (PP&E).
- A higher ratio implies that management is using its fixed assets more effectively. ( does not tell us anything about the ability to generate solid profit)
What is the TOTAL ASSET TURNOVER formula and what part of analysis is it?
What does the TOTAL ASSET TURNOVER tell us, and how does it work?
Sales / Total Assets =
(activity analysis)
- how effectively companies are using their assets to generate sales.
- The higher the asset turnover ratio, the better the company is performing, since higher ratios imply that the company is generating more revenue per dollar of assets.
What is the GROSS PROFIT MARGIN formula and what part of analysis is it?
What does the GROSS PROFIT MARGIN tell us, and how does it work?
( Sales - COGS) / Sales =
(Profitability Analysis)
- The gross profit margin is the percentage of revenue that exceeds the COGS.
- A high gross profit margin indicates that a company is successfully producing profit over and above its costs.
What is the PROFIT MARGIN formula and what part of analysis is it?
What does the PROFIT MARGIN tell us, and how does it work?
NI / Sales =
(Profitability Analysis)
- net profit margin is the ratio of net profits to revenues for a company; it reflects how much each dollar of revenue becomes profit.
- A higher profit margin is always desirable since it means the company generates more profits from its sales.
What is the Break even point BEP formula and what part of analysis is it?
What does the Break even point BEP tell us, and how does it work?
EBIT / Total Assests =
(Profitability Analysis)
- In investing, the breakeven point is said to be achieved when the market price of an asset is the same as its original cost.
What is the ROA formula and what part of analysis is it?
What does the ROA tell us, and how does it work?
NI / Total Assets=
(prof analysis)
- (ROA) helps investors measure how management is using its assets or resources to generate more income.
Roa of 10% is deacent
What is the ROE formula and what part of analysis is it?
What does the ROE tell us, and how does it work?
NI / Total Common Equity =
(Prof Analysis)
- (ROE) helps investors gauge how their investments are generating income
What is the EPS formula and what part of analysis is it?
What does the EPS tell us, and how does it work?
NI / shares outstanding =
(common stock ratio)
- The resulting number serves as an indicator of a company’s profitability.
- The higher a company’s EPS, the more profitable it is relative to share price.
What is the PO formula and what part of analysis is it?
What does the PO tell us, and how does it work?
DPS / EPS =
(common stock ratio)
- showing the proportion of earnings a company pays its shareholders in the form of dividends, expressed as a percentage of the company’s total earnings
