Financial Ratios Analysis Flashcards
accounting
a service activity,
whose function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions
What is ratio analysis used for?
to assess a company’s performance
What is a financial ratio?
dividing one financial statement item by another
What is the purpose of financial ratios?
Allows users to evaluate company performance by focusing on specific relationships between items on the balance sheet and income statement
What are the types of comparative analysis?
- Intra-company basis
- Inter-company basis
- Industry averages
- Horizontal analysis
- Vertical analysis
Intra-company basis
Compare current cash balance to prior year’s cash balance
Inter-company basis
Compare Rx sales between your pharmacy and your classmates pharmacy
Industry averages
Compare your pharmacy sales to all competitors sales (NCPA Digest)
Horizontal analysis
- Also known as trend analysis
- Evaluation of company over time
Vertical analysis
- Also known as common-size analysis
- Percent of a base amount
What does Liquidity Ratios measure?
short-term ability of entity to pay its maturing obligations and meet unexpected needs for cash
What are types of Liquidity Ratios?
- Working capital
- Current ratio
- Quick ratio
- Inventory turnover ratio
- Days in inventory
- Receivables turnover ratio
- Average collection period
What does Solvency Ratios measure?
ability of the entity to survive over a long period of time
What are types of Solvency Ratios?
- Debt to total assets ratio
- Cash debt coverage ratio
What does Profitability Ratios measure?
income or operating success of an enterprise for a given period of time
What are types of Profitability Ratios?
- Earnings per share
- Price-earnings ratio (P/E ratio)
- Gross profit rate
- Profit margin ratio
- Return on assets ratio
- Asset turnover ratio
- Return on equity ratio
Working capital
- Liquidity Ratio
- Current assets – current liabilities
- Positive means greater likelihood of paying liabilities
Current ratio
- Liquidity Ratio
- Current assets ÷ current liabilities
- Greater than 1:1 is desired (depending on industry and some banks look at 2:1)
Quick ratio
- Liquidity Ratio
- (Current assets – inventories – pre-paid expenses) ÷ current liabilities
- Better indicator as to how fast you can pay your creditors
Inventory turnover ratio
- Liquidity Ratio
- Cost of goods sold ÷ average inventory
- How quickly a company sells its goods or how many times the inventory “turns over” during the year
average inventory
(beginning inventory + ending inventory) / 2
Days in inventory
- Liquidity Ratio
- 365 ÷ (inventory turnover ratio)
- Average age of the inventory
Debt to total assets ratio
- Solvency Ratio
- Total liabilities ÷ total assets
- Measures the percentage of assets financed by creditors rather than stockholders
- Higher the percentage, risker the company
Gross profit rate
- Profitability Ratio
- Gross profit ÷ net sales
- Evaluates nature of costs of goods sold
Profit margin ratio
- Profitability Ratio
- Net income ÷ net sales
- Also referred to as net profit margin
- Measures the percentage of each dollar of sales that results in net income
- Evaluates operating costs
