Financial Ratios Flashcards
Gross Profit Margin
(Sales Revenues - Cost of goods sold)/ Sales revenues
Percentage of revenues available to cover operating expenses and yield profit
Operating profit margin
AKA return on sales
(Sales revenue - operating expenses)/ sales revenues
OR
operating income/sales revenue
Profitability of operations without regard to interest or income tax (EBIT)
Net profit margin
aka Net return on sales
= profits after taxes / sales revenues
after tax profits per dollar of sales
total return on assets
=(Profits after taxes + interest)/ total assets
measure of return on total investment in the enterprise
interest added because assets are financed by creditors and stockholders
net return on total assets (ROA)
= profits after taxes / total assets
measure of the return earned by stockholders on the firm’s total assets
Return on stockholders’ equity (ROE)
= profits after taxes / total stockholders’ equity
return that stockholders are earning on their capital investment in the enterprise
average 12% to 15%
Return on invested capital (ROIC)
aka Return on capital employed (ROCE)
= profits after taxes / (long-term debt + total stockholders’ equity)
a measure of the return that shareholders are earning on the monetary capital invested in the enterprise
higher = better effectiveness in the use of long-term capital
Current ratio
a liquidity ratio
= current assets / current liabilties
shows a firm’s ability to pay current liabilties using assets that can be converted to cash in the near term
should be higher than 1.0
working capital
= current assets - current liabilties
cash available for day to day operations
larger = better to pay liabilties + fund new investments
total debt to assets ratio
a leverage ratio
= total debt/ total assets
the extent to which borrowed funds of all types have been used to finance the firm’s operations
low ratio is better. high = “overuse” of debt
long-term debt-to-capital ratio
a leverage ratio
= long-term debt / (long-term debt + total stockholders’ equity)
measure of creditworthiness and balance sheet strength. percentage of capital investment that has been financed by long term lenders
ratio below 0.25 preferable (greater capacity to still borrow additional funds) over 0.5 = excess reliance on long-term debt/ weak balance sheet
debt-to equity ratio
a leverage ratio
=total debt / total stockholders’ equity
the further below 1.0 the greater the firm’s ability to borrow additional funds. Above 1.0 signals a weak balance sheet/ creditor risk
long-term debt-to-equity ratio
a leverage ratio
= long-term debt / total stockholders’ equity
the balance between long-term debt and stockholders equity in the firm’s long-term capital structure
lower ratios = greater capacity to borrow additional funds
Times-interest-earned ratio
aka coverage ratio
a leverage ratio
= operating income/ interest expenses
measures the ability to pay annual interest charges
lenders usually want a minimum of 2.0. 3.0 and up increase creditworthyness
Days of inventory
an activity ratio
= inventory /(cost of goods sold / 365)
measures inventory management efficiency. fewer is better
