Ratios Flashcards
Current Ratio
Current assets / current liabilities
- measures the company’s ability to pay current liabilities with current assets
- Normal is around 1.5
Quick Ratio
aka Acid Test
(current assets - prepaids - inventory) / current liabilities
- measures how much of the current liabilities could be paid off quickly if need be
- acceptable = 0.90 - 1.00
Inventory Turnover
COGS / Average Inventory
- measures how many times in a year inventory turns over
- more is better
Days in Inventory (DIO) = 365 / Turnover
Note: if average is not available, use current ending balance
AR Turnover
Credit Sales/ Average AR
- measures how many times in a year AR turns over (is paid)
- more is better
Days in AR (DSO) = 365 / Turnover (# days, on average, customers are taking to pay)
Note: if average is not available, use current ending balance
AP Turnover
COGS / Average AP
- measures how many times in a year AP turns over
- more is better
Days in AP (DPO) = 365 / Turnover (# days, on average, we take to pay our invoices)
Note: if average is not available, use current ending balance
Cash Conversion Cycle
= DIO + DSO - DPO
(Days inventory outstanding + Days sales outstanding - Days payables outstanding)
- (see turnover cards for formulas)
Gross Margin
(Sales - COGS) / Sales
- measures % of profit made just by selling the product
Profit Margin
Net Income / Sales
- measures how much net income is generated by each $ of sales
Return on Assets
ROA
Net Income / Average total assets
- measures how much the entity earned for each $ of assets
Note: if average is not available, use current ending balance
Return on Equity
ROE
Net Income / Average Equity
- measures how much the entity earned for each $ of equity
Note: if average is not available, use current ending balance
Debt Ratio
Total Liabilities / Total Assets
- Indicates % of assets that are financed by debt
Debt-to-Equity Ratio
Total Liabilities / Equity
- measures the impact of debt financing on equity
Debt Service Coverage
Net Income / (principal + interest payments)
Times-Interest-Earned
Net Income / Interest expense
- measures the number of times operating income can cover interest expense
Asset Turnover
Sales / Average Total Assets
- measures the amount of sales generated for each dollar invested in assets
Note: if average is not available, use current ending balance
Earnings per Share
EPS
(Net Income - Preferred Dividends) / Average # of Common Shares Outstanding
- shows the relationship between net income and common shareholders equity.
- how much income is earned for every $1 invested
Dividend Payout
Yearly dividend per share / EPS
OR
Dividends / Net Income
Price per Earnings Ratio
market price per common share / EPS
- measures the market price of $1 of earnings
Dividend per Yield on Common Stock
Dividend per common share / market price per common share
- measures dividends per share to the stock market price
Book Value per Common Share
(Total shareholder’s equity - Preferred Equity) / weighted average number of common shares outstanding
- calculates the recorded accounting amount for each share
