Formulas - Chapter 3 Flashcards
Operating profit margin or return on sales
Operatingprofitmargin or Returnonsales = OperatingIncome/(NetSales)
Operating Income (or Operating Profit): Profit derived from a company’s core operations, excluding interest and taxes.
Net Sales (or Revenue): Total revenue generated by the company from its primary business operations.
Explanation: This ratio indicates the percentage of profit generated from core business activities for every dollar of net sales. It assesses the operational efficiency of the company. Earning per unit.
Net profit margin
Netprofitmargin = NetProfit1/(Net*Sales);
Net Profit: The total profit earned by the company after all expenses, including taxes and interest.
Net Sales (or Revenue): Total revenue generated by the company from its primary business operations.
Explanation: This ratio measures the percentage of net profit generated for every dollar of net sales. It reflects the overall profitability of the company after considering all costs.
Return on Equity (ROE)
Returnonequity(ROE) = NetIncome/(AverageShareholder*Equity);
Net Income: The profit earned by the company after all expenses.
Average Shareholder Equity: The average value of shareholders’ equity over a specific period.
Explanation: ROE measures the return generated on shareholders’ equity. It indicates how well a company is utilizing equity to generate profits.
Return on Assets (ROA)
ReturnonAssets(ROA) = NetIncome/(TotalAssets);
Net Income: The profit earned by the company after all expenses.
Total Assets: The total assets owned by the company.
Explanation: ROA evaluates how efficiently a company uses its assets to generate profits. It indicates the return earned on each dollar of assets.
Gross Profit Margin
GrossProfitMargin = (Netsales - Costofgoodssold(COGS))/(Net*sales);
Net Sales: The total revenue generated by the company from its primary business operations.
Cost of Goods Sold (COGS): The direct costs associated with producing goods or services sold by the company.
Explanation: This ratio assesses the percentage of revenue retained by the company after accounting for the cost of producing its goods or services. A higher gross profit margin indicates that a larger percentage of revenue is available to cover other operating expenses and generate profit. It provides insights into the efficiency of a company’s production process and pricing strategy.
Net working capital
Networkingcapital = Currentassets - Currentliabilities;
Current Assets: Assets that are expected to be converted into cash or used up within one year.
Current Liabilities: Obligations that are expected to be settled within one year.
Explanation: Net Working Capital represents the difference between a company’s current assets and current liabilities. It provides insight into a company’s short-term liquidity and ability to cover its short-term obligations
Current ratio
Currentratio = Currentassets1/(Currentliabilities);
Current Assets: Assets that are expected to be converted into cash or used up within one year.
Current Liabilities: Obligations that are expected to be settled within one year.
Explanation: The Current Ratio assesses a company’s ability to cover its short-term liabilities with its short-term assets. A ratio greater than 1 indicates that a company has more current assets than current liabilities.
Quick Ratio / Acid test
Quickratio = (marketablesecurities + cash + recievables)/(current*liabilities);
Quick Ratio (Acid-Test Ratio)
Marketable Securities: Short-term, liquid investments that can be quickly converted to cash.
Explanation: The Quick Ratio measures a company’s ability to meet its short-term obligations with its most liquid assets, excluding inventory. It provides a more conservative measure of liquidity.
Cash ratio
Cashratio = (marketablesecurities + cash)/(current*liabilities);
Marketable Securities: Short-term, liquid investments that can be quickly converted to cash.
Current Liabilities: Obligations that are expected to be settled within one year.
Explanation: The Cash Ratio is a more stringent liquidity measure, focusing only on a company’s ability to cover short-term liabilities with its most liquid assets (cash and marketable securities).
Solvency Ratio
Solvency*Ratio = Equity/Assets;
Equity: The residual interest in the assets of the entity after deducting liabilities.
Total Assets: The total resources owned by the entity.
Explanation: The Solvency Ratio assesses the proportion of a company’s assets financed by equity. It indicates the extent to which a company relies on equity to fund its operations.
Total Debt Ratio
Totaldebtratio = TotalLiabilities1/(Total*Assets);
Explanation: The Total Debt Ratio is a measure of the proportion of a company’s total assets that is financed by debt.
Total Liabilities: The total obligations and debts owed by the company.
Total Assets: The total resources owned by the company.
Long Term Debt Ratio
Longtermdebtratio = Longtermdebt/(TotalAssets);
Explanation: The Long-term Debt Ratio focuses on the percentage of a company’s total assets that is funded by long-term debt.
Long-term Debt: The portion of the company’s debt with a maturity period longer than one year.
Total Assets: The total resources owned by the company.
Debt to Equity
Debt to equity=(Liabilities or (longterm debt + value of leases))/(Average Shareholders Equity);
Explanation: The Debt to Equity Ratio assesses the relative contribution of debt and equity to a company’s financing.
Liabilities: The total obligations and debts owed by the company.
Long-term Debt: The portion of the company’s debt with a maturity period longer than one year.
Value of Leases: The total present value of lease obligations.
Average Shareholders’ Equity: The average value of shareholders’ equity over a specific period.
Times interest earned
Timesinterestearnedratio = EBIT/(AnualInterest*Expense);
Explanation: The Times Interest Earned Ratio measures a company’s ability to cover its interest expenses with its operating income.
EBIT: Earnings Before Interest and Taxes, representing a company’s operating profit.
Annual Interest Expense: The total interest expense paid by the company in a year.
Financial Autonomy Ratio
FinancialAutonomyRatio = Equity/Liabilities;
Explanation: The Financial Autonomy Ratio assesses the proportion of a company’s total liabilities financed by equity.
Equity: The residual interest in the assets of the company after deducting liabilities.
Liabilities: The total obligations and debts owed by the company.
