ratio analysis Flashcards
Receivables turnover
ACTIVITY RATIO
- how quickly a company turns its accounts receivable into cash
CALCULATION: Revenue / average receivables
Days Sales Outstanding
ACTIVITY RATIO
- average # of days it takes a company to receive payment for a sale (HIGH = company experiencing delays in receiving payments)
CALCULATION: 365 / receivables turnover
Days of inventory on hand
ACTIVITY RATIO
- average # of days it takes a company to sell inventory stock
CALCULATION: 365 / inventory turnover
Payables turnover
ACTIVITY RATIO
- how quickly a company can pay off its suppliers
CALCULATION: COGS / average accounts payable
Working capital turnover
ACTIVITY RATIO
- how well a company uses its working capital to generate revenue
CALCULATION: revenue / average working capital
Total asset turnover
ACTIVITY RATIO
- how well a company uses its assets to generate revenue
CALCULATION: revenue / average total assets
Number of days payable
ACTIVITY RATIO
- # of days it takes a company to pay off its suppliers
CALCULATION: 365 / payables turnover
Current ratio
LIQUIDITY RATIO
-can company meet its short term liabilities?
- current assets / current liabilities
Quick ratio
LIQUIDITY RATIO
- can company meet its short term obligations with most liquid assets?
- cash + marketable investments + receivables / current liabilities (NO INVENTORY)
Debt-to-equity ratio
DEBT RATIO
-how much financing is done through debt vs. equity (HIGH = more debt)
- total debt/total equity
Debt-to-assets ratio
DEBT RATIO
- how much of a company’s assets are funded by debt
-total debt/total assets
Debt-to-capital ratio
DEBT RATIO
-total debt/total capital (debt + equity)
Financial leverage ratio
DEBT RATIO
- how much of a company’s capital comes from debt
- average total assets / average total equity
DEBT vs COVERAGE ratio
DEBT - measure the amount of debt capital to equity capital (BALANCE SHEET)
- DEBT = short term + long term debt
COVERAGE - company’s ability to cover interest payments (INCOME STATEMENT)
Interest Coverage
COVERAGE RATIO
- how well they can pay interest on debt
EBITDA / cash interest payments
Fixed charge coverage
COVERAGE RATIO
- how well they can pay their fixed expenses
EBITDA - Capex - cash taxes / (cash interest + scheduled amortization)
Gross profit margin
PROFITABILITY RATIO
- Reflects input costs, pricing power over customers and product mix
-Gross profit/revenue
Operating profit margin
PROFITABILITY RATIO
- Ability of firm to control operating costs and overhead
- EBIT / revenue
Pretax margin
PROFITABILITY RATIO
- Reflects the effects on profitability of leverage and other (non-operating) income and expenses
- EBT/revenue
Net profit margin
PROFITABILITY RATIO
- Maybe adjusted for non-recurring items
- net income/revenue
Return on total capital
PROFITABILITY RATIO
- EBIT / average total capital
Return on equity
PROFITABILITY RATIO
- Net income / average total equity
Return in common equity
PROFITABILITY RATIO
- net income – preferred dividends/average common equity
Operating return on assets
PROFITABILITY RATIO
Operating income / average total assets
Return on assets (ROA)
PROFITABILITY RATIO
-Net income / average total assets
Inventory turnover
INVENTORY ANALYSIS
- COGS / average inventory
- decreasing = problems
Gross profit margin
INVENTORY ANALYSIS
- Gross profit / total revenue
- Lower # = bad
Current ratio
INVENTORY ANALYSIS
- Current assets / current liabilities
- Lower # = bad
LIQUIDITY vs. SOLVENCY
Liquidity = ability to pay off short term debt
Solvency = ability to pay off long term debt
DEBT ratios should be: (HIGHER/LOWER) whereas COVERAGE ratios should be: (HIGHER/LOWER)
- Lower
- Higher
