Ratio Analysis: Analyzing Finacial Statements Flashcards
- Profitability Ratios
Measure how much operating income or net income an organization is able to generate relative to its assets, owners’ equity, and sales. The numerator is always the net income after taxes.
Profit Margin
Divide net income by sales, shows the overall percentage of profits earned by the company.
Return on Assets
Net income divided by assets, shows how much income the firm produces for every dollar invested in assets.
Return on Equity (Return on Investment)
Divide net income by owners’ equity, shows how much income is generated by each $1 the owners have invested in the firm. Stockholders use this as one of their key performance yardsticks.
- Asset Utilization Ratios
measure how well a firm uses its assets to generate each $1 of sales.
Receivables Turnover
Sales divided by accounts receivable, indicates how many times a firm collects its accounts receivable in one year. It also demonstrates how quickly a firm is able to collect payments on its credit sales.
Inventory Turnover
Total Asset Turnover
Sales divided by total assets, measures how well an organization uses all of its assets in creating sales. It indicates whether a company is using its assets productively.
- Liquidity Ratios
Compare current (short-term) assets to current liabilities to indicate the speed with which a company can turn its assets into cash to meet debts as they fall due.
Current Ratio
Divide current assets by current liabilities. Nvidia’s current ratio indicates that for every $1 of current liabilities, the firm had $7.67 of current assets on hand.
Quick Ratio (Acid Test)
A far more stringent measure of liquidity because it eliminates inventory, the least liquid current asset. It measures how well an organization can meet its current obligations without resorting to the sale of its inventory.
Current Assets - Inventory / Current Liabilities
- Debt Utilization Ratios
Provide information about how much debt an organization is using relative to other sources of capital, such as owners’ equity. The managers of most firms tend to keep debt-to-asset levels below 50 percent.
Debt to Total Assets Ratio
Add current liabilities to long-term debt and other liabilities or simply subtract stockholders’ equity from total assets. Indicates how much of the firm is financed by debt and how much by owners’ equity.
Times Interest Earned Ratio
Operating income divided by interest expense, is a measure of the safety margin a company has with respect to the interest payments it must make to its creditors. A low times interest earned ratio indicates that even a small decrease in earnings may lead the company into financial straits
- Per Share Data
Investors use this to compare the performance of one company with another on an equal, or per share, basis. Generally, the more shares of stock a company issues, the less income is available for each share.
