PART 4 (financial ratios) Flashcards
Liability ratios
- (definition)
- (3)
Ability to pay all short-term obligations
- Current ratio
- Quick ratio
- Net working capital
current ratio
current assets / current liabilities
quick ratio
(current assets - inventory)/ current liabilities
net working capital
current assets - current liabilities
Leverage ratios
- (definition)
- (3)
How heavily a business is financed with debt
- Debt ratio
- Debt to equity ratio
- Times interest earned
debt ratio
total debt / total assets
debt to equity ratios
total debt / total equity
times interest earned
EBIT / interest charge
Profitability ratios
- (definition)
- (4)
How worthwhile an investment is to providers of funds
- Return on Equity
- Return on Debt
- Return on Investment
- Margin on sales
Return on Equity
2
ROE = (annual profit / equity) x 100%
ROE = ROI + (ROI - ROD) x (debt / equity)
Return on Debt
= (annual interest / total debt) x 100%
Margin on sales
(EBIT / sales) x 100%
Return on Investment
2
= (annual EBIT/ total investment) x 100%
= turnover rate x margin on sales
Turnover rate
= sales / total assets
Positive leverage effect
ROI > ROD
ROE > ROI
