Fs Ratio & Metrics Flashcards
Profabality ratio asses a companies ability
To generate profit from its sales, operations, assets, or equity
Liquidity ratio added a companies ability to
Solvency does
Pay off short term
Pay off long term
Increases in numerator
Decreases in numerator?
Increases ratio
Decrease
Direct relationship
Increases in the denominator
Decrease
Decrease ratio
Increase
Inverse
Profit margin
Net income / net sales
Return on sales
Earning before income tax / net sales
Gross profit margin
Gross profit / net sales
Return on assets
Net income / average total assets
Return on equity
Net income / average total equity
Ratios are used by people
Inside & out of business
Ratios that show financial risk
Liquidity and solvency
Net income 5 / sales 8
Profit margin
Down
Net income 10 / sales 7
Profit margin
Goes up
No preferred stock means
All equity is common
Payout rate
Dividends declared / net income - preferred dividends
If debt is higher than equity
Less solvent
Net income more than equity
Higher return on equity
Income statement measures
Balance sheet measures
Performance
Financial risk
Earnings before income tax could also be called
Operating profit
Competition goes up, what goes down
Profit margin
To be profitable, return on asset should be (business)
Greater than cost of assets
To be profitable return on equity should be greater than (stockholders)
Require return given risk
If a ratio uses sales, never
Use gross sales ; Use NET sales
Ebit formula
Net income + interest + taxes
Profit margin measures
How much profit per dollar of revenue
Return on sales is (not formula)
Greater than profit margin
Gross margin formula
Sales - cogs
Gross profit formula
Sales - Cogs / sales
Profit margin formula
Sales - expenses / sales
Average assets / liabilities formula
Beginning + ending assets or liabilities / 2
Current ratio
Current assets / current liabilities
Quick ratio
Cash + cash equivalents + securities + net AR / current liabilities
Liquidity ratios are
Current / quick ratios
You want your current ratio to be
Greater than 1
Cash conversion cycle
Days sales in receivables
+ days supply in inventory
- days payable outstanding
Accounts receivable turnover ratio
Net credit sales / average net AR
Accounts payable turnover ratio
Cogs / average AP
Inventory turnover
Cogs / average inventory
A higher ar turnover ratio indicates
Takes less time to collect cash
A lower AP turnover ratio indicates
Companies keep cash longer (preferred)
Days sales in receivable ratio
365 / Ar turnover
Days payable outstanding
365 / AP turnover
Days supply in inventory
365 / inventory turnover
Operating cycle formula
Days sales in receivables
+ days supply in inventory
Solvency ratios include
Debt to equity , total debt , times interest earned
Debt to equity ratio
Total debt / total equity
Measures how much financed by creditors
Total debt ratio
Total debt / total assets
Indicates portion of assets that’s credited by creditors
Times interest earned ratio
EBIT / Interest expense
Indicates ability to cover interest expense from income
Total debt is similar to
Liabilities
Ending inventory forumila
Beginning inventory + purchases - cogs
Price earnings ratio
Market price of stock / earnings per share
Dividend payout ratio
Cash dividends / net income
