Financial Ratios Flashcards
What do profitability ratios measures?
the ability of the firm to earn an adequate return or its ability to effectively employ its resources
Gross profit margin
(Sales-COGS)/Sales
What does the gross profit margin indicate?
gross profit earned on each dollar of sales
Operating profit margin
EBIT/Sales
What does the operating profit margin indicate?
operating profits earned on each dollar of sales
Return on Assets
Net Income/Avg. Total Assets
What does the return on assets indicate
firm’s overall efficiency in the use of capital
Return on Equity
Net Income/Avg. Equity
What does the return on equity indicate
the firms return shareholders
What are efficiency ratios?
measures selected aspects of the firm’s operational efficiency
Accounts Receivable Turnover
Sales (Credit)/Avg Accounts Receivable
What does a higher A/R turnover mean?
The higher the better as this means that the AR is not being turned into bad debts; but if too rapid it could indicate too tight of credit policies resulting in reduced sales
Avg Collection Period (Days of Sales)
365 days/AR Turnover
Inventory Turnover
COGS/Avg Inventory
What does a higher inventory turnover ratio mean?
generally the higher the better but if too rapid could indicate that stock is running out
Days of Inventory on Hand
365/Inventory Turnover
Asset Turnover
Sales/Avg. Total Assets
what does the asset turnover show?
the level of sales being generated per dollar of investment in assets
Asset Turnover in days
365 days/Asset turnover
Accounts Payable Turnover
Purchases/ Avg. Accounts Payable
Days Payable Outstanding
365 days/AP Turnover
Current ratio
current assets/current liabilities
What does the current ratio indicate
the ability to pay current liabilities with current assets
Quick Ratio (Acid-Test Ratio)
Current Assets-Inventory-Prepaids/Current Liabilties
