Formulas Defined

Question 1

Liquidity Ratios

Answer 1

Assesses a business’s ability to meet its obligations in the short term

Question 2

Current Ratio

Answer 2

Measures whether a company has enough liquid assets to meet its short-term obligations

Question 3

Acid Test

Answer 3

Measures the ability of a company to use its near cash or most liquid assets to extinguish its current liabilities immediately

Question 4

Operating Cash Flow to Sales

Answer 4

Reveals the ability of a company to generate cash flow in proportion to its sales volume (aka how well a company is generating straight cash from their sales)

Question 5

Free Cash Flow (FCF)

Answer 5

The money a company has left over after paying its operating expenses and capital expenditures

Question 6

Working Capital

Answer 6

Represents operating liquidity (aka available cash) available to a company
Bonus: working capital + fixed assets = operating capital

Question 7

Turnover Ratios

Answer 7

Assesses the efficiency with which a company’s resources are utilized; asset utilization

Question 8

Inventory Turnover Ratio

Answer 8

The rate that inventory stock is sold, used, or replaced (so it’s a number given in days)

Question 9

Receivable Turnover Ratio

Answer 9

Measures how effective a business is at collecting debt and extending credit
This is a turnover rate, meaning it tells you how often you collect your receivables (compare to average collection period)
For Example: If your Receiable Turnover Ratio is 7.8, that means you collect your receivables about 7.8 times/fiscal year

Question 10

Average Collection Period

Answer 10

The length of time a business keeps to collect its accounts receivables (so this is a number in days)
For Example: If the Average Collection Period Ratio is 45, it means it takes about 45 days to collect receivables

Question 11

Capital Turnover Ratio

Answer 11

Measures the proportion of revenue that a company can generate with a given amount of equity

Question 12

Asset Turnover Ratio

Answer 12

Measures how effectively a business is using their assets to generate sales

Question 13

Fixed Asset Turnover Ratio

Answer 13

Measures how effective a business is at using their fixed assets to generate sales

Question 14

Net Working Capital Turnover Ratio

Answer 14

Measures how efficiently a business uses their net working capital to generate revenue

Question 15

Operating Profitability Ratio

Answer 15

Ratios that measure a company’s profitability through the efficiency of its business activity

Question 16

Gross Profit Margin

Answer 16

Indicates to amount of revenue left after subtracting the cost of goods sold
Expressed as a percentage (%) of the total revenue

Question 17

COGS to Sales

Answer 17

Compares the costs of the goods to a company’s sales
Another def: tells what percentage of every dollar your company earns is used by COGS
Usually represented as a percentage (%)

Question 18

SG&A to Sales

Answer 18

Tells what percentage of every dollar your company earns is sucked up by SG&A

Question 19

Operating Profit Margin

Answer 19

Gives the percentage (%) of profit a company makes after paying operating expenses but before paying interest of taxes
Aka – operating income margin, EBIT margin, and return on sales

Question 20

Net Profit Margin

Answer 20

Widely used as a profitability indicator that gauges the company’s financial health
The percentage (%) of sales revenue a company has left after deducting operating expenses, depreciation, amortization, interest, and income taxes
Aka – Return on Sales Ratio

Question 21

Return on Assets

Answer 21

Measures how efficiently a company is in generating profit from their total assets
Usually showed as a percentage (%)
Notice: this is different from Asset Turnover Ratio (ATR) because ATR gives the rate of turning assets to sales and RoA assesses the efficiency of turning assets into profit

Question 22

Return on Equity

Answer 22

Measures how efficiently a company is turning a stockholder’s investment info profit

Question 23

Earnings Per Share (EPS)

Answer 23

The portion of a company’s income that is available to shareholders and allocated to each outstanding share of common stock

Question 24

Dividend Payout Ratio

Answer 24

Measures the percentage (%) of net income that goes to the dividend program (i.e. tells us how much of the net income of the company is going back to the shareholders)

Question 25

Revenue Growth Ratio

Answer 25

Measures the increase in revenue over a period of time; it is a percent increase (or decrease) from a starting point
For Example: if you earned $1 million in revenue last year and $2 million in revenue this year, your Revenue Growth is 100%

Question 26

Financial Risk Ratios

Answer 26

Ratios that demonstrate how leveraged a company is and placed concerning its debt repayment capacity

Question 27

Debt to Assets

Answer 27

Demonstrates the total amount of debt a company has relative to its assets

Question 28

Debt to Equity (D/E)

Answer 28

Shows how much of a company is owned by creditors (ppl the company has borrowed money from) compared to how much the shareholder equity is held by the company

For Example: a ratio of 0.5 means that the company has $.50 of debt for every $1 in equity; a ratio of 1.5 means the company has $1.50 in debt for every $1 in equity

Question 29

Interest Coverage

Answer 29

EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization

Measures a company’s ability to pay the interest on its outstanding debt

Question 30

Stability Ratios

Answer 30

Assesses the company’s stability in the long run

Question 31

Fixed Asset Ratio

Answer 31

Measures how much of the fixed assets that the shareholders have funded

For Example: if the fixed asset ratio is 0.9, the shareholders have financed 90% of the company’s assets

Question 32

Current Assets to Fixed Assets

Answer 32

Measures how much of the fixed assets that the shareholders have funded

For Example: if the fixed asset ratio is 0.9, the shareholders have financed 90% of the company’s assets

Question 33

Coverage Ratios

Answer 33

Assesses whether a company has the resources to pay interest

Question 34

Fixed Interest Cover

Answer 34

Determines how easily a company can pay interest on its outstanding debt