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C 214: Financial Management > Ratio Analysis > Flashcards

Ratio Analysis Flashcards

1
Q

Process of using financial analysis to determine the health of a firm

A

Ratio Analysis

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2
Q

Ratio Analysis is a popular tool for three reasons

A

Standardization
Flexibility
Focus

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3
Q

One of the four classifications of ratios designed to measure the ability of a firm to pay its near-term obligations

A

Liquidity Ratios

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4
Q

Liquidity Ratios speak to a firm’s ability to meet

A

Short-Term Obligations

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5
Q

Most Common Liquidity Ratios

A

Current Ratio
Quick Ratio
Accounts Receivable Turnover
Average Collection Period
Inventory Turnover
Days on Hand

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6
Q

Current Assets / Current Liabilities

A

Current Ratio

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7
Q

Higher current ratios are usually interpreted to mean

A

better likelihood that the firm will be able to meet its short-term obligations

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8
Q

(Current Assets- Inventory) / Current Liabilities

A

Quick Ratio

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9
Q

A company with a high quick ratio is usually viewed as having

A

Greater ability to meet short-term obligations

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10
Q

Credit Sales / Accounts Receivable

A

Accounts Receivable Turnover

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11
Q

Accounts receivable turnover describes

A

The number of times a firm’s AR account turns over in a year

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12
Q

An AR ratio of 12 means

A

The company collects its entire AR 12 times a year, or about once a month

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13
Q

365/AR Turnover

A

Average Collection Period (ACP)

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14
Q

These two ratios can provide the same information

A

Average Collection Period and Accounts Receivable Turnover

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15
Q

COGS/Inventory

A

Inventory Turnover

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16
Q

Inventory Turnover is the number of times the firm

A

Turns over (sells) inventory annually

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17
Q

365 / Inventory Turnover

A

Days on Hand (DOH)

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18
Q

DOH simply converts the inventory turnover into a

A

Day count metric

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19
Q

If inventory turnover is 2, the firm has about how many days of inventory on hand?

A

180
(365/2)

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20
Q

One of the four classifications of ratios designed to see how well the firm is using its assets and investments

A

Efficiency Ratios

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21
Q

Efficiency ratios measure how effectively a company/management team uses assets to

A

Generate sales or profits

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22
Q

The most commonly used efficiency ratios are

A

Total Asset Turnover (TAT)
Fixed Asset Turnover (FAT)
Operating Income Return on Investment (OIROI)

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23
Q

Sales / Total Assets =

A

Total Asset Turnover

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24
Q

A TAT of three indicates that for every $1 of assets,

A

the firm is generating $3 in sales

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25
Sales / Fixed Assets =
Fixed Asset Turnover
26
Fixed assets include all
Non-Current Assets, or total assets minus current assets
27
Managers with low risk tolerance will maintain
Higher Current Asset Levels
28
A company's fixed asset holdings are largely determined by
the industry in which it operates
29
EBIT/Total Assets =
Operating Income Return on Investments (OIROI)
30
OIROI describes the relationship between
operating profit (EBIT) and the company's asset base
31
OIROI tells us
how much pre-tax, pre-financing profit the company generates per dollar of assets
32
All assets must be
Financed
33
One of the four classifications of ratios designed to measure how the firm finances its operations
Financing Ratios
34
Common Financing Ratios are
Debt Ratio Interest-Bearing Debt to Total Capital Times Interest Earned Ratio Financial Leverage Ratio
35
Total Liabilities / Total Assets
Debt Ratio
36
The debt ratio measure the proportion of
the firm's assets financed with debt
37
A debt ratio of .4 means
for every dollar of assets held by the firm, 40 cents is financed with debt
38
Interest-Bearing Debt / (Interest-Bearing Debt + Owners' Equity) =
Interest Bearing Debt to Total Capital (IBDTC)
39
Interest-Bearing Debt to Total Capital is a more precise measure of a firm's
financial structure
40
EBIT / Interest Expense =
The Times Interest Earned (TIE) Ratio
41
The Times interest earned ratio tells us how many times a company
can pay interest expense given operating profit
42
Total Assets / Equity =
Financial Leverage Ratio (FLR)
43
The Financial Leverage Ratio is similar to the
Debt Ratio
44
One of the four classifications of ratios designed to measure the profitability of the firm
Profitability Ratios
45
Common Profitability Ratios are:
Return on Assets Return on Equity Gross Margin Operating Margin Net Margin
46
Net Income / Total Assets
Return on Assets
47
Net Income / Owners' Equity
Return on Equity
48
One of the most important metrics by which managers are evaluated
Return on Equity
49
A firm that is effectively using debt will have an ROE that _______ ROA
Exceeds
50
Gross Profit / Sales
Gross Margin
51
Gross margin measures the percent of revenue remaining after the
Cost of Goods Sold
52
High gross margins are usually associated with
an efficient production process
53
EBIT/ Sales =
Operating Margin
54
The percent of sales remaining after covering the costs of goods sold AND operating expenses
Operating Margin
55
Operating margin is frequently compared with
different capital structures
56
The portion of a firm's assets that are financed by either liabilities (debt) or by equity
Capital Structures
57
The mix of debt and equity is referred to as the
Capital Structure
58
Net Income / Sales
Net Margin
59
Measures the percent of revenue that drops to the bottom line
Net Margin
60
All ratio analysis should be
integrative
61
The DuPont equation indicates that ROE is a function of
operating efficiency
62
The DuPont equation indicates that TAT is a function of
Asset Efficiency
63
The DuPont equation indicates that FLR is a function of
Financing policy
64
The three main comparison standards for ratio analysis
Trend Analysis Cross-Sectional Analysis Internal Goal Monitoring
65
An analysis used to examine a firm's ratios over time
Trend Analysis
66
Frequently, trend analysis looks back
5 years
67
The trend analysis can sometimes forecast forward
3 years
68
An analysis used to compare a firm's ratios to a peer group
Cross-Sectional Analysis
69
Ratios can measure progress relative to specific goals set within the company
Internal Goal Monitoring
70

C 214: Financial Management (9 decks)

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