Ratios Flashcards
1
Q
Return on equity
A
- Profitability ratio
- Net Earnings/ Avg. SE
- Measures how much
income was earned for
every dollar invested by
the owners. - The higher the ratio percentage,
the more efficient management is
in utilizing its equity base and the
better return is to investors.
2
Q
Return on Assets (ROA)
A
- Profitability ratio
- Net Earnings/ Avg. total assets
- Measures a firm’s success
in using assets to generate
earnings, independent of
the financing of those
assets. - The higher the Return on Assets,
the better, because the company
is earning more money on less
investment.
3
Q
Gross Profit margin or percentage
A
- Profitability ratio
- Gross profit/ Net sales
- Measures how much gross
profit is generated from
every sales dollar. Gross profit as a percent of sales - Indicates how effective
management is at selling an item
for more than the cost to
purchase or produce it.
4
Q
Net profit margin percentage
A
- Profitability ratio
- Net earnings/ Net Sales
- Measures how much gross
profit is generated from
every sales dollar. - Indicates how effective
management is at selling an item
for more than the cost to
purchase or produce it.
5
Q
Earnings per share (EPS)
A
- Profitability ratio
- Net earnings available to common SH/ Avg. nb of common shares outstanding
- Net earnings (-preferred dividends)/ Avg. Nb. common shares outstanding
- Measures the return on
investment the company is
making per share. - A higher EPS is a sign of a higher
earnings, strong financial position
and, therefore, a reliable company
to invest money.
6
Q
Quality of Earnings
A
- Profitability ratio
- Cash flow from operations activities/ Net earnings
- Measures the earnings
generated per dollar in
operating activities. - Ratio higher than 1 usually
indicates high quality earnings,
while the ratio lower than 1 is
considered to indicate low quality
earnings.
7
Q
Total Asset Turnover
A
- Asset turnover ratio
- Net sales / Avg. total assets
- Indicator of the efficiency
with which a company is
deploying its assets. - The amount of sales or revenues
generated per dollar of assets.
8
Q
Fixed Asset turnover
A
- Asset turnover ratio
- Net sales/ Avg. net fixed assets
- Measures a company’s
ability to generate net
sales from fixed-asset
investments - A higher ratio shows that the
company has been more effective
in using the investment in fixed
assets to generate revenues.
9
Q
Receivables turnover
A
- Asset turnover ratio
- Net credit sales/ Avg. net accounts receivables
- Measures how many times
a business can turn its
accounts receivable into
cash (recorded or collected) during a period - Higher ratios mean that
companies are collecting their
receivables more frequently
throughout the year.
(Determined by Credit Terms)
10
Q
Inventory Turnover ratio
A
- Asset turnover ratio
- COGs/ Avg. Inventory
- Measures how many times
a company’s inventory is
sold and replaced over a
period. - A low turnover implies poor sales
and, therefore, excess inventory.
A high ratio implies either a strong
sales or ineffective buying. - Ability to sell its inventory
11
Q
A/P or A/R turnover
A
- Liquidity ratio
- Net credit sales/ Avg. Net AP or AR
- How many times per year average trade receivables are collected
- A higher ratio indicates stronger liquidity
- Ability to collect its receivalbles
12
Q
Average days to pay payables
A
- 365/ AP turnover ratio
13
Q
Current ratio (working capital)
A
- Liquidity ratio
- Current assets/ Current liabilities
- Measures the ability to pay
back its short-term
liabilities with its short-term
assets. - The higher the current ratio, the
more capable the company is of
paying its obligations.
14
Q
Quick ratio
A
- Liquidity ratio
- Quick assets/ Current liabilities
- Quick ratio compares quick assets, defined as cash and near-cash assets, to current liabilities
- Measures whether the highly liquid assets of the company, those that can be converted to cash quickly, are sufficient to cover CL.
15
Q
Cash ratio
A
- Liquidity ratio
- (Cash+ Cash equivalents)/ Current liabilities
- Measures the company’s ability to cover its ST obligations using only cash and cash equivalents
