Ratio Analysis For Forecasts & Projections Flashcards
Working capital:
Current assets - current liabilities
Higher is better
Current ratio:
Current assets / current liabilities
Higher is better
Quick ratio:
(Current assets - inventory) / current liabilities
Higher is better
Operating cash flow ratio:
Cash flow from operations / current liabilities
Higher the better - tells us how much cash a company has generated from operating activities to cover current liabilities.
Working capital turnover:
Sales / Average Working Capital\
Want to be in line with industry standard - shows us how well the company is converting working capital into sales
Days in inventory:
End Inventory / (COGS / 365)
Want to be in line with industry average - shows us the average number of days required to sell inventory
Days sales in AR:
End AR / (Sales / 365)
Want to be in line with industry standard - shows how quickly the firm is collecting outstanding receivables
Days in payables outstanding:
End AP / (COGS / 365)
Want to be in line with industry standard - as long as the firm is meeting the payment terms, it should look to extend this period in order to conserve cash
Cash conversion cycle:
Days in inventory + days sales in AR - days payables outstanding
Want days inventory to be down, days sales in AR to be down, and days payables outstanding to be up.
Want this too be in line with industry average. Lower the better.
Debt to equity ratio:
Liabilities / equity
Indicated the degree of protection to creditors in case of insolvency. Want to be lower as a higher debt ratio signifies a company has more risk.
Total debt ratio:
Liabilities / Assets
Want to be lower as a higher ratio means the company’s risk increases.
Times interest earned ratio:
EBIT / Interest Expense
Want to be higher - means a company has more funding to cover its required interest expense associated with debt. By paying down old debt or replacing old debt with new debt carrying lower interest rates, interest expense can be lowered in the future which will increase the ratio.
Gross margin:
(Sales - COGS) / Sales
Higher is better
Profit margin:
Net income / sales
Higher is better
Return on equity:
Net income / equity
Higher is better
