Financial Ratios

Question 1

What is the CURRENT RATIO formula and what part of analysis is it?

Answer 1

CA/CL= ( ) to 1

Liquidity Analysis

Question 2

What does the CURRENT RATIO tell us, and how does it work?

Answer 2

• 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

Question 3

What is the QUICK RATIO formula and what part of analysis is it?

Answer 3

(CA - INV)/CL = ( ) to 1

Liquidity Analysis

Question 4

What is the DEBT RATIO formula and what part of analysis is it?

Answer 4

Total Liabilities / Total Assets

Debt Analysis

Question 5

What does the DEBT RATIO tell us, and how does it work?

Answer 5

• 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.

Question 6

What is the Times Interest Earned (TIE) formula and what part of analysis is it?

Answer 6

EBIT / Int. Expense =

Debt Analysis

Question 7

What does the TIE tell us, and how does it work?

Answer 7

• 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.)

Question 8

What is the INVENTORY TURNOVER formula and what part of analysis is it?

Answer 8

COGS / Inventory =

Activity Analysis

Question 9

What does the INVENTORY TURNOVER tell us, and how does it work?

Answer 9

• 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.

Question 10

What is the RECEIVABLE TURNOVER formula and what part of analysis is it?

Answer 10

SALES / RECEIVABLES

ACTIVITY ANALYSIS

Question 11

What does the RECEIVABLE TURNOVER tell us, and how does it work?

Answer 11

• 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

Question 12

What is the AVERAGE COLLECTION PERIOD (ACP) formula and what part of analysis is it?

Answer 12

REC / (sales/365 or what ever period of time) =

Activity analysis

Question 13

What does the AVERAGE COLLECTION PERIOD (ACP) tell us, and how does it work?

Answer 13

• 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.

Question 14

What is the AVERAGE PAYMENT PERIOD (APP) formula and what part of analysis is it?

Answer 14

Acct Pay / (sales/365 or what ever period of time) =

Activity analysis

Question 15

What does the AVERAGE PAYMENT PERIOD (APP) tell us, and how does it work?

Answer 15

• 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.

Question 16

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?

Answer 16

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)

Question 17

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?

Answer 17

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.

Question 18

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?

Answer 18

( 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.

Question 19

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?

Answer 19

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.

Question 20

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?

Answer 20

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.

Question 21

What is the ROA formula and what part of analysis is it?

What does the ROA tell us, and how does it work?

Answer 21

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

Question 22

What is the ROE formula and what part of analysis is it?

What does the ROE tell us, and how does it work?

Answer 22

NI / Total Common Equity =
(Prof Analysis)
- (ROE) helps investors gauge how their investments are generating income

Question 23

What is the EPS formula and what part of analysis is it?

What does the EPS tell us, and how does it work?

Answer 23

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.

Question 24

What is the PO formula and what part of analysis is it?

What does the PO tell us, and how does it work?

Answer 24

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

Question 25

What is the DPS formula and what part of analysis is it?

What does the DPS tell us, and how does it work?

Answer 25

PO / EPS =
(common stock ratio)
- Dividend per share (DPS) is the sum of declared dividends issued by a company for every ordinary share outstanding

Question 26

What is the PE formula and what part of analysis is it?

What does the PE tell us, and how does it work?

Answer 26

Price Per Share / EPS
(common stock ratio)
- P/E ratios are used by investors and analysts to determine the relative value of a company’s shares in an apples-to-apples comparison
- A high P/E ratio could mean that a company’s stock is overvalued, or else that investors are expecting high growth rates in the future.