Lecture 1 (8/28/14) Flashcards
What two ratio’s are used to find liquidity?
Current Ratio and Quick Ratio
What is the equation for the current and quick ratio’s?
Current= Current Assets / current liabilities
Quick= (current assets - inventory) / current liabilities
Which liquidity equation takes out inventory from current assets? Why would it do this?
The quick ratio
This is because in some companies the inventory must be sold at a clearance price which reduces the amount received from inventory below what inventory is valued at on the books
What are the profitability ratios? What are their equations?
Return on equity = net income / book equity
Return on assets = net income / assets
Profit Margin = net income / revenue
In the return on equity ratio it is net income / book equity. What is “book equity”?
This is the value at which the equity was purchased at rather than the current market value (market value or market cap is the amount the amount shares are going for in the market)
How do you find the market value of equity?
Shares outstanding x current price
What are the leverage ratio’s? What are the equations?
Debt to Equity = Liabilities / Equity
Debt Ratio = Liabilities / Assets (= weight of debt)
Interest Coverage Ratio = (EBIT + Depr Exp.) / Interest Exp
What is income smoothing through reserve accounts?
setting aside money for said contingencies or future debts etc, but really just setting money aside to make things look better in future years, because investors like steady numbers
What fraud has happened with managerial options
They used to give options to managers and then wouldn’t expense it as part of salary. Now it has to be expenses
Channel stuffing
this is shipping things out to people at the end of the reporting period to count them as sales, but they know the stuff will get sent back
What leverage ratio is the same as finding “weight of debt”
The debt ratio
What are the management ratios? What are they? Do you want these higher or lower? Why?
Total Asset Turnover = Sales / Assets (higher because making efficient use of assets)
Inventory Turnover = COGS / Inventory (Higher, because means not holding onto inventory)
Days Sales Outstanding = 365 / (Sales / Accounts Rec.)
What are the valuation ratio’s? What are the equations?
Sustainable Growth Rate (g) = (1 - payout ratio) x return on equity
–(measures how quickly the company will grow with the same debt to equity ratio, how quickly will your equity grow)
Effective Tax Rate (T) = Tax Expense / Earnings Before Tax (EBT)
Earnings Per Share = Net Income / Shares Outstanding
How do you find your payout ratio?
Hard Way (Plowback Ratio) = 1 - Change in Retained Earnings / Net Income
Key statistics tab on yahoo
What does “EBIT” and “EBT” stand for?
Earnings Before Interest & Tax
Earnings Before Tax
