Ratios

Question 1

Current Ratio

Answer 1

Current assets / current liabilities

• measures the company’s ability to pay current liabilities with current assets
• Normal is around 1.5

Question 2

Quick Ratio

aka Acid Test

Answer 2

(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

Question 3

Inventory Turnover

Answer 3

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

Question 4

AR Turnover

Answer 4

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

Question 5

AP Turnover

Answer 5

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

Question 6

Cash Conversion Cycle

Answer 6

= DIO + DSO - DPO
(Days inventory outstanding + Days sales outstanding - Days payables outstanding)

• (see turnover cards for formulas)

Question 7

Gross Margin

Answer 7

(Sales - COGS) / Sales

• measures % of profit made just by selling the product

Question 8

Profit Margin

Answer 8

Net Income / Sales

• measures how much net income is generated by each $ of sales

Question 9

Return on Assets

ROA

Answer 9

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

Question 10

Return on Equity

ROE

Answer 10

Net Income / Average Equity

• measures how much the entity earned for each $ of equity

Note: if average is not available, use current ending balance

Question 11

Debt Ratio

Answer 11

Total Liabilities / Total Assets

• Indicates % of assets that are financed by debt

Question 12

Debt-to-Equity Ratio

Answer 12

Total Liabilities / Equity

• measures the impact of debt financing on equity

Question 13

Debt Service Coverage

Answer 13

Net Income / (principal + interest payments)

Question 14

Times-Interest-Earned

Answer 14

Net Income / Interest expense

• measures the number of times operating income can cover interest expense

Question 15

Asset Turnover

Answer 15

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

Question 16

Earnings per Share

EPS

Answer 16

(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

Question 17

Dividend Payout

Answer 17

Yearly dividend per share / EPS
OR
Dividends / Net Income

Question 18

Price per Earnings Ratio

Answer 18

market price per common share / EPS

• measures the market price of $1 of earnings

Question 19

Dividend per Yield on Common Stock

Answer 19

Dividend per common share / market price per common share

• measures dividends per share to the stock market price

Question 20

Book Value per Common Share

Answer 20

(Total shareholder’s equity - Preferred Equity) / weighted average number of common shares outstanding

• calculates the recorded accounting amount for each share