Financial Ratios Flashcards
What is the Current Ratio?
Regarded as a test of liquidity for a company
expresses the ‘working capital’ relationship of current assets available to meet the company’s current obligations
FORMULA:
Total Current Assets / Total Current Liabilities
What is Quick Ratio?
Sometimes a company could be carrying heavy inventory as part of its current assets, which might be obsolete or slow moving
Thus, eliminating inventory from current assets and then doing the liquidity test is measured by this ratio
The ratio is regarded as a key test of liquidity for a company
FORMULA:
Total Quick Assets / Total Current Liabilities
Note: quick assets = total current assets minus inventory
What is the Debt to Equity Ratio?
Measures how the company is managing its debt against the capital of its owners
If liabilities exceed the net worth then in that case the creditors have more stake in the business than the shareowners
Net Worth is another term for Owners’ Equity
FORMULA:
Total Liability / Owner’s Equity
What is the DSO (Day’s Sales Outstanding) Ratio?
Shows both the average time it takes to turn receivables into cash, and the age, in terms of days, of a company’s accounts receivable.
Regarded as a test of efficiency for a company.
It is the effectiveness with which it converts its receivables into cash. This ratio is of particular importance to creditors and bankers.
FORMULA
(Total Accounts Receivable / Total Revenue) x # Days in Fiscal Period
What in the Inventory Turnover?
Regarded as a test of Efficiency
Indicates the “quickness” with which the company is able to move its merchandise
FORMULA:
Total Sales / Total Inventory
What is the Accounts Payable to Sales (%) Ratio?
Indicates how much of their supplier’s money a company uses in order to fund its sales.
A higher ratio means that the company is using its suppliers as a source of cheap financing.
The working capital of such companies could be funded by their suppliers.
FORMULA:
(Accounts Payables / Annual Sales/Revenue) x 100
What is the Return on Sales OR Profit Margin (%) Ratio?
Determines a company’s ability to withstand competition and adverse conditions (like rising costs, falling prices or declining sales in the future)
Measures the percentage of profits earned per dollar of sales
Indicates how efficiently the company makes money
FORMULA:
(Net Income / Revenue) x 100
What is the Return on Assets Ratio?
Determines its ability to utilize the assets employed in the company efficiently and effectively to earn a good return (profit)
Measures the percentage of profits earned per dollar of asset
Indicates how efficiently the company in generates profits on its assets.
FORMULA: (Net Income / Total Assets) x 100
What is the Return on Equity Ratio?
Measures the ability of the management of the company to generate adequate returns for the capital invested by the owners of a company
Generally a return of 10% would be desirable to provide dividends to owners and have funds for future growth of the company
FORMULA:
(Net Income / Owner’s Equity) x 100
What is the Earnings Per Share?
The most important variable in determining a share’s price
An indicator of a company’s profitability
FORMULA: Net Income - Dividends on Preferred Shares / Average # Shares Outstanding
What is the Price/Earnings Ratio?
Represents the multiple of earnings per common share (sometimes called the “multiple”)
Shows how much investors are willing to pay per dollar of earnings
FORMULA:
Stock Price/Share / Earnings per Share (EPS)
What is the Price/Earnings to Growth Ratio?
An important indicator of a stock’s potential value
It’s favoured over the P/E ratio as it accounts for growth
A lower PEG means a company’s stock is undervalued
Value investors look for a value less than 2
FORMULA: Price/Earnings Ratio / Annual Earnings Per Share
What is the Dividend Yield Ratio?
Represents the return or “yield” on share’s dividend, expressed as a percentage and annualized
Can be used to spot potential earnings based on company performance
FORMULA:
Dividend/Share / Stock Price/Share
What is the Earnings Yield Ratio?
Inverse of the Price-Earnings Ratio
shows the percentage of each dollar invested in the stock that was earned by the company
Used to determine if a stock is overvalued or undervalued, when compared to another index (eg. A bond index)
FORMULA:
Earnings Per Share / Stock price/Share
