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
Cash Conversion Cycle
Average Collection Period+Days of Inventory-Days Payable
What do solvency ratios measure?
the firm’s debt position on balance sheet and its ability to service debt
Debt Ratio
total liabilities/total asset
Debt to equity
total liabilities/total equity
What does the debt to equity ratio indicate
the relative proportion by which firm is financed through debt vs shareholder’s equity
Debt Service Coverage
Net Operating Income/(Principal + Interest Payments)
Times Interest Eaerned
EBIT/Interest Expense
What does the time interest earned ratio represent
indicates the number of time the EBIT covers the interest expense.
Reflects accounting earnings rather than cash flow
Debtors are interested in cash flow (ability to pay principal and interest ) as well as the value of security
Working Capital
current assets- current liabilties
Measure of liquidity
