Module 24.1 - 24.3 Financial Ratios Flashcards
What are the five most important tools for ratio analysis?
1) Project future earnings and cash flow
2) Evaluate a firm’s flexibility
3) Assess management’s performance
4) Evaluate changes in the firm and industry over time
5) Compare the firm with industry competitors
What are the five limitations of ratio analysis?
1) Financial ratios are not helpful when viewed in isolation.
2) Comparisons with other companies are made more difficult by different accounting treatments
3) It is difficult to find comparable industry ratios
4) Conclusions cannot be made by calculating a single ratio
5) Determining the target or comparison value for a ratio is difficult.
How are horizontal common size balance sheets and income statements formed?
the beginning year is all 1.0 and then the following years are all in relation to the beginning year.
What is regression analysis?
can be used to identify relationships between variables.
What are activity ratios?
several ratios that refer to asset utilization or turnover ratios
What are liquidity ratios?
refer to the ability for a firm to pay short-term obligations
What are solvency ratios?
provide information on how well the company generates operating profits and net profits
What are valuation ratios?
Sales per share, earnings per share, and price to cash flow per share etc.
What is the formula for receivables turnover?
annual sales / average receivables
measures how efficiently a firm is managing its assets
what is the formula for days of sales outstanding?
365 / receivables turnover
average collection period
What is the formula for inventory turnover?
cost of goods sold / average inventory
measures a firms efficiency with respect to its processing and inventory management
What is the formula for days of inventory on hand?
365 / inventory turnover
measures the average inventory processing period
What is payables turnover?
purchases / average trade payables
measure the use of credit by the firm
What is number of days of payables?
365 / payable turnover ratio
What is total asset turnover?
revenue / average total assets
measures a firms use of total assets to create revenue
What is fixed asset turnover?
revenue / average net fixed assets
measures utilization of fixed assets
What is working capital turnover?
revenue / average working capital
measures how effectively a company is using its working capital
What is the defensive interval ratio?
cash + marketable securities + receivables / average daily expenditures
what is the cash conversion cycle?
What does a high cash conversion cycle imply?
(days sales outstanding) + (days of inventory on hand) - (number of days payable)
the company has excessive amount of capital investment in the sales process
What is fixed charge coverage?
(earnings before interest and taxes + lease payments) / (interest payments + lease payments)
What is the formula for return on assets when interest expense is given?
net income + interest expense (1 - tax rate) / average total assets
