Financial Ratios

Question 1

Profit margin

Answer 1

Profit margin = NI / R = net income / revenues

Question 2

Asset turnover

Answer 2

Asset turnover = R / avg TA = revenue / average total assets

Question 3

Cash flow yield

Answer 3

COFA / NI = cash flow from operating activities / net income

Question 4

Debt to equity ratio

Answer 4

Debt to equity ratio = TL / TE = total liabilities / total equity

Question 5

Return on assets

Answer 5

Return on assets = NI / avg TA = net income / average total assets
Return on assets = profit margin x asset turnover
Since (NI / R) x (R / avg TA) = (NI x R) / (R x avg TA) = NI / avg TA

Question 6

Cash return on assets

Answer 6

Cash return on assets = COFA / avg TA = cash flow from operating activities / average total assets
Cash return on assets = return on assets x cash flow yield
Since (NI / avg TA) x (COFA / NI) = (NI x COFA) / (avg TA x NI) = COFA / avg TA

Question 7

Return on equity

Answer 7

Return on equity = NI / avg TE = net income / average total equity
Will always be greater than return on assets, since equity < assets

Question 8

Current ratio

Answer 8

Current ratio = current assets / current liabilities

Question 9

Working capital

Answer 9

Working capital = current assets – current liabilities

Question 10

Inventory turnover

Answer 10

Inventory turnover = cost of goods sold / average inventory
the average number of times a company sells an amount equal to its average level of inventory during an accounting period

Question 11

Days’ inventory on hand

Answer 11

Days’ inventory on hand = days in accounting period (365) / inventory turnoverthe average number of days it takes a company to sell an amount equal to its average inventory