Financial ratios Flashcards
Liquidity ratio
measure the short-term ability of company to pay its bills and meet unexpected needs for cash
Current ratio
expresses the relationship of current assets to current liabilities
Quick ratio:
also measures the company immediate short-term liquidity, but excludes inventory and prepaid assets as they are the least liquid current assets
Current cash debt coverage
provides a cash-basis measure of liquidty
Average collection period
converts receivable turnover ratio into a measure of average number of days
Receivable turnover
(1) measure the number of times on average that account receivables are converted into cash (2) to assess the effectiveness of company’s credit and collection policies.
Inventory turnover
the liquidity of inventory by measuring the number of times on avergae that inventory is sold during the period
Average days in inventory
converts inventory turnover into average number of days it takes to sell the inventory
Solvency ratio
measure the ability of company to survive over a long period of time (long-term)
Debt to total assets ratio
show degree of leverage by measuring the percentage of total assets funded by creditors through debt financing
Debt to equity ratio
the relative use of debt financing (total liabilities) compared with equity financing (total equity) by company
Times interest earned (interest coverage)
the company’s ability to use and sustain debt financing by measuring its ability to meet interest payments as they become due
Cash debt coverage
measure the comapny’s ability to repay its liabilities using cash generated from operating activities, qithout having to liquidate the assets used in the operations
Free cash flow
measure the number of excess cash generated by company after taking into account all investments to maintain its current productive capacity
Profitability ratio
measure profit of company in a given period of time
Company’s profit affects?
(1) Its ability to obtain debt and equity financing
(2) Its ability to grow
(3) Its liquidty position
Return on equity
measure the number of profit earned for each dollar invested by company’s shareholders
ROE is affected by?
(1) ROA
(2) Debt to total asset ratio
Return on assets
measure the number of profit earned for each dollar invested in its assets
ROA is affected by?
(1) Profit margin
(2) Asset turnover
Profit margin
number of each dollar of sales that result in profit, which is the rate of return on each sales dollar
Profit margin is affected by?
(1) Gross profit margin
(2) Operating expenses to sales ratio
Asset turnover
how efficiently a company use its asset to generate sales
High-volume business achieve?
high asset turnover but low profit margin
Low-volume business
low asset turnover but high profit margin
Gross profit margin
measures company’s ability to maintain an adequate selling price that is above it cost
Operating expenses to sales ratio
measures cost incurred to support each dollar of sales
Cash return on sales ratio
uses net cash provided by operating activities as numerator
Earning per share
measures profit earned on each ordinary share
Price earning ratio (P/E)
measures that ratio of market price of each ordinary share to earnings per share
=> Provide shareholder confience in company based on investors’ assessment of company’s future earnings
Dividend payout rate
percentage of prodit distributed to shareholders in form of cash dividends
DuPoint analysis
provide insight into how company’s ROE is generated by (1) operating efficiency (2) Asset effectiveness (3) Capital structure
