Ratios

Question 1

Types of ratios

Answer 1

Liquidity
Asset management
Debt management
Profitability
Market

Question 2

Liquidity ratios:

Answer 2

Current ratio

Quick ratio

Question 3

Current ratio

Answer 3

current assets / current liabilities

there isn’t a specific “magic number”, but pay attention to trends

Question 4

Quick ratio

Answer 4

(Current assets - inventory) / current liabilities

Inventory takes longer to convert than cash

Question 5

Asset Management ratios

Answer 5

Inventory turnover
Days sales outstanding
Total Asset Turnover
Fixed Asset Turnover

Question 6

Inventory Turnover

Answer 6

sales/inventory

Short-term
you want a big number, although it varies depending on the nature of the business
Supply chain-minimize unoptimized resources

Question 7

Days Sales Outstanding

Answer 7

accounts receivable/average daily sales
=AR / (Sales/365)

Short-term
Units in days
You want a small number

Question 8

Days sales outstanding is also known as the

Answer 8

receivables collection period

Question 9

“common sizing”

Answer 9

divide every element on balance sheet by total assets and every element on income statement by sales to get percentage values that give you a more accurate picture when comparing companies

Question 10

Total Asset Turnover

Answer 10

Sales/ Total Assets

Question 11

Fixed Asset turnover

Answer 11

Sales/Net Fixed Assets

Question 12

You usually look at ___ and ____ in conjunction because they are both productivity measures

Answer 12

Total and Fixed Asset Turnover

Question 13

Debt Management ratios

Answer 13

Debt-asset ratio
Equity-asset ratio
Times Interest Earned
EBITDA coverage

Question 14

Debt-asset ratio

Answer 14

(Current liabilities + long term debt) / total assets

Question 15

Equity-asset ratio

Answer 15

Shareholders’ equity / total assets

Question 16

Debt asset ratio + Equity asset ratio = ?

Answer 16

1

Question 17

(1 - Equity asset ratio)= ?

Answer 17

Debt asset ratio

Question 18

Everything that isn’t debt is ___

Answer 18

Equity

Question 19

Capital structure is ___

Answer 19

how you finance a firm

Question 20

Times Interest Earned ratio

Answer 20

EBIT/Interest Expense

If =1, operating income = interest expense, which means net income is 0
Look for growth over time or loss over time

Question 21

“Be concerned if it approaches 1” applies to which ratio?

Answer 21

Times Interest Earned

Question 22

EBITDA Coverage

Answer 22

(EBITDA + Lease Payments) / (Interest expense + debt repayment + lease payments)

Answers the question: does my operating income generate enough to repay debt and pay current principle as well?

Question 23

Profitability Ratios

Answer 23

Operating Margin
Profit Margin
Basic earning power
ROA
ROE

Question 24

Operating Margin

Answer 24

EBIT/Sales

Cost structure of production process
You want the number to be rising

Question 25

Profit Margin

Answer 25

Net income/Sales How much of revenue makes it to operating income?

Question 26

Basic Earning Power

Answer 26

EBIT/Total Assets

Question 27

Basic Earning Power is comparable to which other ratio?

Answer 27

Total Asset Turnover, which is Sales/Total Assets instead of EBIT/Total Assets

Question 28

ROA

Answer 28

Return on Assets | Net income/total assets

Question 29

ROE

Answer 29

Return on Equity | Net income/Common equity

Question 30

ROA and ROE are measures of _____ because

Answer 30

leverage | if you have less equity, you have more debt

Question 31

Which ratio has the most influence on a company's valuation in stock?

Answer 31

ROE

Question 32

Market/Margin Ratios

Answer 32

Used to think about share prices ``` DPS EPS Sales per share Cash Flow per share BVPS Dividend Yield P/E Ratio Price-to-sales ratio Price-to-cash-flow ratio market-to-book ratio ```

Question 33

DPS

Answer 33

Dividends per share | Dividends/shares outstanding

Question 34

EPS

Answer 34

Earnings per share | Net income/shares outstanding

Question 35

Sales per share

Answer 35

revenue/shares outstanding

Question 36

cash flow per share

Answer 36

net cash flow from operations/shares outstanding

Question 37

BVPS

Answer 37

Book value per share | (book value of common equity) / shares outstanding

Question 38

Dividend Yield

Answer 38

Dividends per share/ share price

Question 39

Divident Yield is also known as

Answer 39

"yield on stock"

Question 40

P/E Ratio

Answer 40

Price earnings ratio | Share price/sales per share

Question 41

Price to cash-flow ratio

Answer 41

share price/cash flow per shair

Question 42

Market-to-book ratio

Answer 42

share price/book value of a share

Question 43

"Shares outstanding" commonly refers to

Answer 43

common shares outstanding

Question 44

DuPont management control system for improving which ratio?

Answer 44

Return on Equity = profit margin x total asset turnover x "equity multiplier" =net income/sales x sales/total assets x total assets/common equity = net income/common equity when you cancel out numerators and denominator Dissect each part of a business. By making good operating decisions, choosing assets that generate sales, and finding the right mix of debt and equity to finance a firm, you can improve profit margin, total asset turnover, and the equity multiplier, which in turn improves ROE

Question 45

"equity multiplier"

Answer 45

1/equity asset ratio | =total assets/common equity