Key Ratio Midterm

Question 1

Current Ratio

Answer 1

= Current Assets / Current Liabilities
=> amount of current assets available to satisfy current liabilities (>1)
>< too high -> hold too much assets/ inventory isn’t sold

Question 2

Earnings per share

Answer 2

= Net earnings/average number of shares outstanding (or common shares)
=> operating performance and profitability

Question 3

Total Asset Turnover Ratio

Answer 3

= Sales (or Operating) Revenues/Average Total Assets
-> how efficient in using asset to generate sales

Question 4

Return on Assets (ROA)

Answer 4

Net earnings/Average Total assets
=> how much the firm earned from the use of asset

Question 5

Net Profit Margin

Answer 5

Net Earnings/Net sales (operating revenues)
=> effective management at generating earnings on every dollar of sales

Question 6

Return on Equity

Answer 6

Net earnings/ Average shareholders Equity
=> assess the effectiveness of the company business strategy - how much earned on every dollar of investor

Question 7

Quality of earnings

Answer 7

cash flow from operating activities/net earnings
=> what portions of net earnings was generated in cash

Question 8

Capital expenditures ratio

Answer 8

cash flow from oper. activities/cash paid for capital expenditures (or PPE)
=> High ratio = opportunities for acquisitions + avoid cost for additional debt + reduce the risk of bankrupt

Question 9

Free Cash Flow

Answer 9

Cash flow from ope. activities - dividends - capital expenditures
=> ability to pursue long-term investment opportunities

Question 10

Receivables Turnover

Answer 10

Net credit sales/ average net accounts receivable
=> effectiveness of credit granting and collection activities

Question 11

Gross Profit Percentage

Answer 11

Gross Profit/Net sales
=> excess of sales prices over the costs to sales