Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFA Ratios > R20 Ratios > Flashcards

R20 Ratios Flashcards

You may prefer our related Brainscape-certified flashcards:
CFA flashcards
1
Q

Activity ratios (just mention what it measures)

A

Activity ratios measure: Efficiency of a company in performing its day to day operations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Liquidity ratios (just mention what it measures)

A

Liquidity ratios measure: A company’s ability to meet its short-term obligations.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Solvency ratios (just mention what it measures)

A

Solvency ratios measure: A company’s ability to meet its long-term obligations.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Profitability ratios (just mention what it measures)

A

Profitability ratios measure: A company’s ability generate profit from its resources.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Activity Ratios - Inventory turnover

A

Inventory turnover = COGS / Average Inventory

Interpretation:
- Indicates how many times per period the entire inventory was sold.
- Measures the ability of a company to sell its inventory.
- Higher number means greater efficiency because inventory is kept for a shorter period. It could also mean insufficient inventory, which in turn, might affect growth / revenue.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Activity Ratios - Days of inventory on hand

A

Days of inventory on hand = number of days in period / inventory turnover

Interpretation: On an average, how many days of inventory is kept on hand.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Activity Ratios - Receivables turnover

A

Receivables turnover = revenue / average receivables

Interpretation:
- Indicates how quickly a company collects cash.
- More appropriate to use credit sales instead of revenue but it is not readily available.
- A higher number means greater efficiency in credit and collection. It could also mean stringent cash collection policies are hurting potential sales.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Activity Ratios - Days of sales outstanding

A

Days of sales outstanding = number of days in period / receivables turnover

Interpretation:
- Elapsed time between credit sale and cash collection.
- Higher number means it takes a long time to collect receivables.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Activity Ratios - Payables turnover

A

Payables turnover = Purchases / Average trade payables

Interpretation:
- Indicates how quickly a company pays suppliers.
- A high number means the company is paying suppliers quickly and is possibly not making use of credit facilities.
- Low number may mean the company is facing trouble making payments on time and signal liquidity issues.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Activity Ratios - Number of days of payables

A

Number of days of payables = number of days in period / payables turnover

Interpretation: On an average, how many days it takes to pay suppliers.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Activity Ratios - Working capital turnover

A

Working capital turnover = Revenue / Average working capital

Interpretation:
- Indicates how efficiently a company generates revenue from working capital.
- Working capital = current assets (CA) – current liabilities (CL)
- Higher number means greater efficiency. If CA = CL, then working capital would be zero making the ratio meaningless.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Activity Ratios - Fixed asset turnover

A

Fixed asset turnover = revenue / average net fixed assets

Interpretation:
- Indicates how efficiently a company generates revenue from fixed assets.
- A higher number means efficient use of fixed assets.
- A lower number may mean inefficiency, or newer business (higher carrying value on B/S), or a capital-intensive business.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Activity ratios - Total asset turnover

A

Total asset turnover = Revenue / Average total assets

Interpretation:
- Indicates how efficiently a company generates revenue from total assets (fixed + current assets).
- As with other turnover ratios, higher number means efficiency.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Liquidity Ratios - Current Ratio

A

Current Ratio = current assets / current liabilities

Interpretation: A higher number implies greater liquidity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Liquidity Ratios - Quick Ratio

A

Quick Ratio = (cash + marketable securities + receivables) / current liabilities

interpretation: A higher number implies greater liquidity.
More conservative than current ratio as only more liquid current assets are included.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Liquidity ratios - cash ratio

A

Cash ratio = (cash + marketable securities) / current liabilities

interpretation: This is the most conservative liquidity ratio and a good measure of a company’s ability to handle a crisis situation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

liquidity ratio - Defensive interval ratio

A

Defensive interval ratio = (cash + marketable securities + receivables) / daily cash expenditures

Interpretation: Measures the number of days a company can operate before it runs out of cash. A higher number implies greater liquidity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Liquidity ratios - cash conversion cycle (net operating cycle)

A

Cash conversion cycle (net operating cycle) = Days of inventory on hand (DOH) + Days of sales outstanding (DSO) - Number of days of payables

Hitesh’s formula:

Net operating cycle / cash conversion cycle = [inventory days + receivable days] - payable days

[inventory days + receivable days] - operating cycle

Interpretation: The time between cash paid (to suppliers) and cash collected (from customers). A low number is better for the company as it means high liquidity. A long cash conversion cycle implies low liquidity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Purchases

A

CFA formula:
Purchases = cost of goods sold + ending inventory - beginning inventory

Hitesh’s formula:
Beginning inventory + purchases - COGS = Ending inventory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Solvency Ratios - Debt ratios - debt-to-assets ratio

A

Debt-to-assets ratio = total debt / total assets

interpretation: Measures the amount of debt in total assets.
Higher debt means low solvency and higher risk. A ratio of 0.5 implies 50% of assets are financed with debt.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Solvency rations - debt ratios - debt-to-capital ratio

A

Debt-to-capital ratio = total debt / (total debt + total shareholder’s equity)

interpretation: Measures the amount of debt as a percentage of capital (debt + shareholder’s equity).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Solvency ratios - debt ratios - debt-to-equity ratios

A

Debt-to-equity ratio = total debt / total shareholder’s equity

Interpretation: Measures the amount of debt as a percentage of equity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

solvency ratios - debt ratios - financial leverage ratio

A

Financial leverage ratio = average total assets / average total equity

Interpretation: measures the amount of assets per unit of equity. A higher value means a company is more leveraged.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Solvency ratios - debt ratios - debt-to-EBITDA Ratio

A

Debt-to-EBITDA Ratio = Total debt / EBITDA

Interpretation: estimates how many years it would take to repay total debt based on earnings before income taxes, depreciation and amortization (an approximation of operating cash flow).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Liquidity ratios - Operating cycle

A

Operating cycle = Inventory days + receivable days

26
Q

Solvency Ratios - Coverage Ratios - Interest coverage ratio OR time interest earned

A

Interest coverage ratio OR time interest earned = EBIT / Interest Payments

Interpretation: measures the company’s ability to make interest payments (how many times the company can make interest payments with its EBIT). Unlike the other solvency ratios, a higher value for this ratio is better as it means stronger solvency.

27
Q

Solvency Ratios - Coverage Ratios - Fixed charge coverage ratio

A

Fixed charge coverage ratio = (EBIT + lease payments) / (Interest payments + lease payments)

Interpretation: measures the ability of a company to pay interest on debt. Here, lease payments are added to EBIT as they are an obligation like interest payments. Like the interest coverage ratio, a higher value for this ratio implies stronger solvency. This ratio is a more meaningful measure for companies that lease a large portion of their assets. For example, airline companies.

28
Q

Profitability ratios - return on sales - gross profit margin

A

Gross profit margin = gross profit / revenue

Interpretation: A higher value means higher pricing and lower costs.

29
Q

Profitability ratios - return on sales - operating profit margin

A

Operating profit margin = operating income / revenue

Interpretation: Operating profit = gross profit - operating costs. A good sign if operating profit margin grows at a faster rate than gross profit margin.

30
Q

Profitability ratios - return on sales - pretax margin

A

Pretax margin = EBT / Revenue

Interpretation: EBT = operating profit - interest related expenses. Needs further analysis if pretax income increases only because of non-operating income.

31
Q

Profitability ratios - return on sales - net profit margin

A

net profit margin = net profit / revenue

interpretation: Net profit = revenue – all expenses.

32
Q

Profitability ratios - return on investment - operating ROA

A

Operating ROA = Operating income / average total assets

Interpretation: For return, either net income or operating income (EBIT) can be used.

33
Q

Profitability ratios - return on investment - ROA

A

ROA = Net income / average total assets

Interpretation: For return, either net income or operating income (EBIT) can be used.

34
Q

Profitability ratios - return on investment - return on total capital

A

return on total capital = EBIT / (Average short term and long term debt + equity)

interpretation: Like operating ROA, EBIT is used. Measures return on capital before deducting interest.

35
Q

Profitability ratios - return on investment - return on equity (ROE)

A

ROE = net income / average total equity

Interpretation: A very important measure of return earned on equity capital. Unlike return on common equity, it includes minority and preferred equity.

36
Q

Profitability ratios - return on investment - return on common equity

A

return on common equity = (net income - preferred dividend) / average common equity

Interpretation: Money available to common shareholders.

37
Q

2-stage Du Pont Analysis

A

ROE = (Net income / Total assets) * (Total assets / Equity)

ROE: ROA * Financial Leverage

38
Q

3-stage Du Pont Analysis

A

ROE = (Net income / Sales OR Revenue) * (Sales OR Revenue / Total assets) * (Total assets / Equity)

ROE= (net profit margin) * (asset turnover) * (leverage ratio)

39
Q

5-stage Du Pont Analysis

A

ROE = (Net income / EBT) * (EBT / EBIT) * (EBIT / Sales OR Revenue) * (Sales OR Revenue / Total assets) * (Total assets / Total equity)

ROE = (tax burden) * (interest burden) * (EBIT margin) * (asset turnover) * (financial leverage)

40
Q

Valuation ratio - P/E

A

P/E = Price per share / Earnings per share

Interpretation: most often used valuation measure. Prone to earnings manipulation. Non-recurring earnings may distort the ratio.

41
Q

Valuation Ratio - P/CF

A

P/CF = Price per share / Cash flow per share

Interpretation: less prone to manipulation than P/E.

42
Q

Valuation Ratios - P/S

A

P/S = price per share / sales per share

Interpretation: used when net income is not positive.

43
Q

Valuation Ratios - P/BV

A

P/BV = price per share / book value per share

Interpretation: an indicator of what the market perceives. A value greater than 1 means future rate of return is higher than required rate of return.

44
Q

Per-share quantities - Basic EPS

A

Basic EPS = (Net income - preferred dividends) / Weighted average number of ordinary shares outstanding

45
Q

Per-share quantities - Diluted EPS

A

Diluted EPS = (Adjusted income) / Weighted average number of ordinary shares outstanding

46
Q

Per-share quantities - Cash flow per share

A

Cash flow per share = Cash flow from operations / Weighted average number of shares outstanding

47
Q

Per-share quantities - EBITDA per share

A

EBITDA per share = EBITDA / Weighted average number of shares outstanding

48
Q

Per-share quantities - Dividends per share

A

Dividends per share = Common declared dividends / Weighted average number of shares outstanding

49
Q

Dividend Ratios - Dividend payout ratio

A

Dividend payout ratio = Dividend / Earnings

Interpretation: Measures the percentage of earnings a company pays out as dividends to equity shareholders.

50
Q

Dividend Ratio - retention ratio

A

Retention Ratio = 1 - payout ratio

Interpretation: Measures the percentage of earnings a company retains.

51
Q

Dividend Ratio - sustainable growth rate

A

Sustainable growth rate = retention rate x ROE

Interpretation: measures how much growth a company is able to finance from its internally generated funds. A higher retention rate and ROE result in higher sustainable growth rate.

52
Q

Credit Analysis Ratio - EBITDA interest coverage

A

EBITDA interest coverage = EBITDA / Gross Interest*
*Gross interest include non-cash interest on conventional debt instruments

Interpretation: a high value implies good credit quality.

53
Q

Credit Analysis Ratio - FFO (Funds from operations) to debt

A

FFO (Funds from operations) to debt = FFO / Total debt

Interpretation: a high value implies good credit quality.

54
Q

Credit Analysis Ratio - Free operating cash flow to debt

A

Free operating cash flow to debt = (CFO (adjusted) - capital expenditures) / Total debt

Interpretation: a high value implies good credit quality.

55
Q

Credit analysis ratio - EBIT margin

A

EBIT margin = EBIT / Total Revenue

Interpretation: a high value implies good credit quality.

56
Q

Credit Analysis Ratio - EBITDA margin

A

EBITDA margin = EBITDA / Total revenue

Interpretation: a high value implies good credit quality.

57
Q

Credit Analysis Ratio - Debt to EBITDA

A

Debt to EBITDA = Total debt / EBITDA

Interpretation: low debt/EBITDA implies good credit quality.

58
Q

Credit Analysis Ratio - return on capital

A

Return on Capital = EBIT / Average beginning-of-year and end-of-year capital

Interpretation: a high value implies good credit quality.

59
Q

Valuation Ratios (just mention what it measures)

A

Valuation ratios measure: Quantity of an asset or flow per share.

60
Q

Calculate tax burden from tax rate

A

Tax burden = 1 - tax rate
0.7 = 1 - 0.3
0.7 would be the tax burden

CFA Ratios (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions