Ratios Flashcards
Ratios - Liquidity
Ability to Pay short term obligations when due
Ratio - current Ratio aka Working Capital
A measure of liquidity
How much do current assets exceed current liabilities
Current assets / current liabilities
Current assets=cash,A/R, inventory
This may be used to see if you meet your debt covenants
Ratio analysis allows for comparing two companies using different currency
True
Ratios - Liquidity
Quick ratio aka Acid Test ratio
Quick ratio will normally be lower than the current ratio because the current ratio includes more assets-excludes inventory
Uses ONLY most (Highly) liquid assets
Cash and cash equivalents
Plus short term marketable securities
Plus receivables (net)
Divided by current liabilities
Operation and Efficiency ratios measure
Inventory turnover
Receivables turnover
Profitability ratios measuring
Always have net income in the numerator… denominators have balance sheet account
Ratios numerator goes up then the ratio goes
UP
and Vice versa is true- numerator goes down and ratio goes down
Current and quick- you want to have a higher numerator
Common size balance sheet or income statement
Used to compare two companies of very different sizes
Example: putting 2 company balance sheets side by side
Divide cash by total assets to get the percentage cash for each company
Current and quick rations:
If a denominator goes down
Then the ratio gets better
(Liabilities are lowering)
Ratio Liquidity
Times Interest Earned Ratio
Ability to meet current interest expense
Net income (before taxes) plus Interest Expense / Interest Expense
***the numerator is EBIT
*if net income is given after tax then add tax expense back and then add interest expenses we back to get the numerator
EBIT
Income from operations
…. Before interest and Taxes
Inventory turnover
- Calculate average inventory
Beginning plus ending / 2 - Inventory turnover ratio
Cost of goods sold / avg inventory
Higher number is better
Inventory Conversion (days in inventory)
Ending inventory/ cost of goods sold/ 365 (days)
1. Divide cost of goods by 365 first
2. Divide ending inventory by 365
Lower number is better because inventory is converted quickly
Accounts Receivable Turnover
Net credit sales / average receivables
To get avg receivables- take beginning plus ending (subtract and allowance for doubtful accounts from each) and divide by 2
Higher number is better! You will collect quickly
Days Sales in Receivables … average collection period
Ending AR /. Sales / 365
Lower is better because receivables are converted quickly to cash
Operating cycle
The operating cycle is the period it takes to convert inventory to sales (receivables) and those same receivables into cash
Take receivables collection period (lower is better) and add inventory conversion period (lower is better)
Number of days to sell plus number of days to collect
Cash conversion cycle aka
Net Operating Cycle
How many days does it take to pay the vendor (higher is better)
Days sales in AR plus Days in Inventory minus Days of payables outstanding
Accounts payable turnover
Cost of goods sold / average accounts payable
Lower is better
Accounts payable deferral period
Ending A/P. / COGS/365
(Higher is better)
Transaction affect on ratios
If the numerator and denominator increase equally will the ratio stay the same
It depends:
If the starting ratio is above 1 (example 2:1) then the final ratio in this situation would be a decrease
If the start is less than 1 then it will be an increase
Transaction effects on ratios
How to calculate
Adjust the ratios by simply adding one to the numerator or denominator accordingly or an amount less than that is the starting numerator is less than 1 (example adjusting top and bottom by .2)
Total asset turnover
Net sales / average total assets
Working capital turnover
- Calculate avg working capital
Working capital (assets minus liabilities) for each year added together and divide by 2 - Net sales / Average working capital
Special note: Inventory ratios use
Cost of goods sold, not sales
Net profit margin
Net income after income taxes /
Sales
Return on Assets ratio
Net income / average total assets
Basic earnings per share
Income available to common shareholders divided by
Weighted average of common shares outstanding
Price earnings ratio
Price per share divided by
Basic earnings per share
Dividend payout
Cash dividends divided by
Net income
Debt to equity
Total liabilities divided by
Total equity
Total debt ratio
Total liabilities divided by
Total assets
