Module 4 - Ratios

Question 1

EBITDA coverage

Liquidity measures: Interest coverage

Answer 1

(Earnings before Interest, Taxes, Depreciation & Amortization) / Interest expense

• How much Operating Cash is available to cover meet interest payments?
• Stays within the income statement
• Management discretionary items are highest in the I/S

Question 2

Gross Margin:

Answer 2

(Sales – COGS) / Revenue

PRODUCTS:
How profitable the products are
Rough economic measure of customer utility
**Margin: Divided by Revenue

Question 3

Operating Margin:

Answer 3

Operating profit / Revenue

OPERATIONS:
How profitable are the company’s operations?
**Margin: Divided by Revenue

Question 4

EBITDA Margin

Answer 4

EBITDA / Revenue

CASH FLOW:

• Rough measure of Cash Flow profitability
• Compares Income Statement to Income Statement
• EBITDA = Cash Flow
• *Margin: Divided by Revenue

Question 5

Capex / Depreciation

Answer 5

Rough measure of business (asset) expansion

Question 6

Time Interest Earned

Answer 6

EBIT / Interest Expense

EBIT = Earnings before Interest and Taxes
EBIT = OPERATING INCOME
- Ability to meet interest obligations with Operating Income
- Numerator and denominator from the I/S
- Management discretionary items are highest in the I/S

Question 7

Cash Coverage

Answer 7

CFO / Interest expense
FCF / Interest expense

CASH = CASH FLOW

• Ability to meet interest obligations with Cash Flow
• Cash flow figures are too volatile to be compared to Income Statement in near term.
• Use a four-quarter period to remove seasonality or normalized figures.

Question 8

Cash flow to Debt

Answer 8

CFO (or FCF) / Total debt

Ability of cash flow to pay down the company’s debt
Total debt = short-term debt + long-term debt

Question 9

Net Cash

Answer 9

Cash - Debt

• Assumes most Operating Cash is financed with revolvers, etc.

Question 10

Current Ratio

Answer 10

Current Assets / Current Liabilities

• Ability of Cash Flow to pay down the company’s debt (liabilities)

Question 11

Quick Ratio

Answer 11

(Current Assets – Inventories…..)/ Current Liabilities

How quickly assets can be turned into cash

Question 12

Cash conversion cycle

Answer 12

DIO+DSO-DPO

Measures cash’s path from the INITIAL INVESTMENT in product creation through to RECEIPT FROM CUSTOMERS
Use yearly days for yearly income statement figures
Match quarterly with quarterly

Question 13

DIO

Answer 13

Days Inventory Outstanding

DIO = (Inventory/ COGS)* 365

or 90 for quarterly

Products: Inventory is related COGS
** Item outstanding is numerator

Question 14

DSO

Answer 14

Days Sales (Receivables) Outstanding

DSO = (AR /Total Credit Sales)* 365

or 90 for quarterly

Sales: Accounts Receivable is related to Credit Sales
** Item outstanding is numerator

Question 15

DPO

Answer 15

Days Payables Outstanding

DPO = (Accounts Payable/COGS)* 365

Payables: Payables are related to COGS (suppliers)

** Item outstanding is numerator

Question 16

Debt to Equity

Answer 16

Total Debt / Shareholders’ Equity

• Typically calculated with Book Values
• B/S to B/S –> use average

Question 17

Debt to Cap

Answer 17

Total Debt / Market capitalization

• Market value of Equity
• More effective if the FSA also uses the market value of debt
• B/S to B/S (use averages)

Question 18

Enterprise value

Answer 18

EV = Market capitalization + Debt + Minority Interest + Preferred shares - Total Cash

MD MP - Cash

• Theoretic takeout value

Question 19

Enterprise Value to EBITDA

Answer 19

EV / EBITDA

• How many times cash flow is the company worth?
  EBITDA = Cash Flow

Question 20

Cost of Debt (Kd)

Answer 20

DEBT = BONDS

Yield rate = Risk free rate + Risk premium (Company)
- Risk premium = default risk * loss given default

The credit rating can be a proxy for the company risk premium