Ratios

Question 1

Liquidity Ratios:
What are they and how to Calc Them

Answer 1

Bill-paying abilities (for bills due within a year)

1) Current Ratio: A number that tells us how many bill cycles we can cover:
CA/CL

Can also use WC (WC $ = CA-CL)
(how much is left over)

2) Quick Ratio (acid test):
remove Ppds and Inventory

(Cash + Equit Securities + Net AR) / CL

Question 2

Solvency Ratios

Answer 2

Is the company able to pay it’s long-term bills. Lower is usually better

1) Debt-to-Total Assets :
Total Liab / Total Assets

2) Debt-to-Equity:
Total Liabilities/Total Equity

Question 3

Activity Ratios
*Hint: Turning BS Items into a Span of Time

Answer 3

Turnover Ratios:
How well are the Assets used to generate Sales.
Higher is better.

1) AR Turnover: How efficient is Collections
**Hint, turn over the AR into the denominator
Net Credit Sales / Avg AR, NET

ALSO: Average Collection period: 365 days/AR Turnover

2) Inventory Turnover:
COGS/ Avg Inventory

ALSO: Days in Inventory 365/Inventory Turnover

3) Asset Turnover:
Net Sales/Average Total Assets

Question 4

Market Ratios
*Hint: From the investor’s perspective

Answer 4

1) Price-to-Earnings: P/E Ratio
Stock Price Per Share/Basic EPS

2) Book Value Per Share:
CS Shareholder’s Equity/ * Shares O/S of C/S
**CS SE: Remove everything related to PS

Question 5

Profitability (Income Statement) Ratios

Answer 5

1) Profit Margin Ratio:
Shows how much is available to shareholders after Expenses are deducted
Net Income after Int and Taxes / Net Sales

2) Gross Margin:
Looks at Pricing Strategy
Gross Profit / Net Sales

3) ROA:
Net Income / Avg Total Assets

4) ROE:
Net Income / Avg CS Equity

5) ROS:
Net Income b4 Interest Income, Interest Expense, Taxes / Net Sales

6) Dividend Payout Ratio: Percentage of NI paid out in Cash Dividends
a) Cash Dividend per CS/ EPS OR
b) Entire Cash Dividend/ Net Income