Module 6 Flashcards
What items help us uncover important relationships between financial statement items?
different types of ratios
______ are typically most useful when making comparisons to other companies or to the past performance of the
company itself.
Ratios
most commonly evaluated ratios is a firm’s ________, which shows the return that a business generated during a period on the equity invested in the business by the owners of the business.
return on equity (ROE)
How does one calculate the Return on Equity?
ROE = Net Income / Owners’ Equity
The DuPont Framework expands the ROE formula to consist of three factors - what are those three factors?
- Profitability
- Efficiency
- Leverage
ROE = Profitability x Efficiency x Leverage
The DuPont Framework measures profitability using ________.
Profit Margin
The DuPont Framework measures efficiency using ________.
Asset Turnover
The DuPont Framework measures leverage using the _________.
Leverage Ratio (or Equity Multiplier)
Profitability reveals how much profit is left from each dollar of sales after all ______ have been subtracted.
expenses
How do you calculate the profit margin?
Profit Margin = Net Income / total sales for the period
The _________ ratio is calculated by dividing gross profit by total sales for the period and tells us what percentage of our revenue is left to cover other expenses after the cost of goods sold is subtracted.
gross profit margin
Gross profit is equal to sales _____ cost of goods sold.
minus
__________ is a measure of how much income the business has generated while ignoring the effect of financing and capital structure, or the proportion of debt that the business has.
Earnings before interest after taxes (EBIAT)
To measure Operating Efficiency, _________ tells us how
well a business is using its assets to produce sales.
asset turnover
How do you calculate asset turnover?
Asset Turnover = Sales / Average Assets
A business that can create more revenue with fewer
assets is _____ efficient.
more
The Asset Turnover ratio uses both the _________ and the _________; we typically use the average of the beginning and ending balance sheet amounts to estimate the average level of assets during the period.
income statement; balance sheet
__________ helps understand how efficiently a business is managing its inventory levels.
Inventory turnover
How does one calculate the Inventory turnover ratio?
Inventory turnover = COGS / average inventory
A ______ inventory turnover represents more efficient inventory management.
higher
The _________ relates to inventory turnover. The only
difference is that it is expressed as the average number of days the inventory is held before it is sold rather than how many times the inventory turned over during the period.
Days Inventory
How does one calculate the Days Inventory ratio?
Days Inventory = 365 / inventory turnover
The ________ indicates a business’ efficiency in collecting receivables from customers.
accounts receivable turnover (AR turnover)
How does one calculate accounts receivable turnover or AR turnover?
accounts receivable turnover = sales / average accounts receivable
A higher AR turnover represents ______ efficient cash collections.
more
The _________, sometimes referred to as Days Sales Outstanding or Days Sales in Receivables, is the average number of days it took for a business to collect payment from a customer.
average collection period
How does one calculate average collection period?
average collection period = 365 / AR turnover
To measure _________, we look at how long it takes us to pay our vendors.
Accounts payable turnover (AP turnover)
How does one calculate accounts payable turnover (AP turnover?
AP Turnover = COGS / average accounts
payable
Another way to gauge our is to look at ______________.
days purchases outstanding
How does one calculate days purchases outstanding?
days purchases outstanding = 365 / AP Turnover
The days purchases outstanding, days inventory, and average collection period combine into what is called
a ___________.
cash conversion cycle
The cash conversion cycle is a measure of how long it takes a business from the time it has to ____ for inventory from its suppliers until it _____ cash from its customers.
pay; collects
What is another name for Financial Leverage?
Equity Multiplier
The Equity Multiplier measures the impact of all non-equity financing, or ____ of all sorts, on the firm’s ROE.
debt
How does one calculate the Equity Multiplier?
Equity Multiplier = average total assets / average total equity
If all of the assets are financed by equity, the multiplier is __.
1
As liabilities, which are forms of debt, increase, the multiplier ________ from 1 demonstrating the leverage impact of the debt.
increases
Another very common indicator of leverage is the ________ ratio,
debt to equity ratio
How does one calculate the debt to equity ratio?
debt to equity ratio = average total liabilities / average total equity
The _________ helps us understand the business’ ability to pay its short term obligations.
current ratio
How does one calculate the current ratio?
current ratio = current assets / current liabilities
The current ratio focuses on the business’ more _____ assets and liabilities, or those that are convertible to cash or coming due, within a year.
liquid
The _______ is similar to the current ratio except only highly liquid current assets can be used in the numerator.
quick ratio or acid test ratio
How does one calculate the quick ratio?
quick ratio = (current assets - inventory) / current liabilities
The ______ is a good way to gauge how capable a business is of making the interest payments on its debt.
interest coverage ratio or times interest earned
How does one calculate interest coverage ratio?
interest coverage ratio = EBIT / interest expense
What does EBIT stand for?
Earnings Before Interest and Taxes (EBIT)
Ratios can be very useful when comparing one company to another because they allow you to eliminate to a large extent the impact of ____ differences that exists among companies.
size
Considerations such as _______ and the impact of _______ differences may need to be taken into account when analyzing financial information.
seasonality; policy
