Ratio Analysis Flashcards
What purpose do debt-utilization metrics serve?
They provide measures of balance sheet risk (i.e., in terms of financial leverage). An enterprise is considered more leveraged, and thus more risky, if it has a comparatively high amount of debt versus owners’ equity.
What purpose do market ratios serve?
They are used to evaluate the value of the enterprise as based on capital market reflections of stock price as related to earnings and book value.
What purpose do asset-utilization metrics serve?
They examine the efficiency with which assets are used to maintain and generate wealth.
Describe the difference between gross margin (GM) and contribution margin (CM).
GM = revenue minus cost of goods sold; CM = revenue minus variable expenses.
List the formula for operating profit margin.
Operating income / Revenue.
What purpose do liquidity metrics serve?
They are used to evaluate an enterprise’s ability to meet its short-term obligations.
