Ratios Flashcards
Liquidity ratios
Liquidity ratios are measures of a firms short-term ability to pay maturing obligations
Activity ratios
Activity ratios are measures of how effectively an enterprise is using its assets
Profitability Ratios
Profitability ratios measure the financial performance of an enterprise for a given time period
Investor Ratios
Investor ratios are measures that are of interest to investors
Long-term Debt-Paying ability ratios(Coverage ratios)
Coverage ratios are measures of security for long-term creditors/investors
Working Capital Formula
Current assets- Current Liabilities
Current ratio(working capital ratio)
Current assets/current Liabilities
Ability to meet short term obligations
Acid-test ratio
(Cash equivalents + Marketable Securities + Accounts Receivable)/ Current Liabilities
Ability to meet short term needs
Cash ratio
(Cash equivalents + Marketable Securities)/ Current Liabilities
Accounts receivable turnover
Net credit sales/Average net receivables
The ability to successfully collect outstanding receivables. Faster turnover gives credibility to the current and acid-test ratios
Accounts receivable turnover in days
365/Receivable turnover
Average number of days to collect accounts receivable
Inventory turnover
Cost of goods sold/ Average inventory
This measures how quickly inventory is sold is an indicator of enterprise performance. The higher the turnover the better the performance
Inventory turnover in days
365/Inventory turnover
Indicates the average number of days required to sell inventory
Operating cycle
AR Turnover in days + Inventory turnover in days
The operating cycle indicates the number of days between acquisition of inventory and realization of cash from selling inventory.
Working Capital Turnover
Sales/Average working capital
This ratio indicates how ieffectively working capital is used
Total asset turnover
Net Sales/ Average total assets
Indicator of how effective use of its assets. High ratio indicates effective asset use to generate sales
Accounts payable turnover
Cost of goods sold/ Average accounts payable
this ratio indicates the number of times trade payables turn over during the year. A low turnover may indicate a delay in payment, such as from a shortage of cash
Days in accounts payable
365/Accounts payable turnover
this ratio indicates the average length of time trade payables are outstanding befor year end.
Net Profit Margin
Net Income/Net Sales
This ratio indicates profit rate, when used with the asset turnover ratio, indicates rate of return on assets.
Return on total assets
Net income / Average total assets
Return on assets
Net profit margin X Total asset turnover
Note that this ratio uses both profit margin and the total asset turnover. This ratio allows for increased analysis of the change in percentages. The net profit margin indicates the percent return on each sale while the asset turnover indicates the effective use of assets in generating that sale.
return on Investment
(Net income + Interest Expense(1-Tax rate))/Average( Long- term liabilities + equity)
ROI measures the performance of the firm without regard to the method of financing
Return on Common Equity
(Net Income- Preferred dividends)/ Average common equity
This ratio uses net income less preferred dividends in the numerator to better measure returns accruing to common shareholders.
Net operating margin percentage
Net operating income/ Net Sales
Gross(Profit) margin percentage
Gross (profit) margin/ Net Sales
Operating Cash flow per share
Operating cash flow/ Common shares outstanding
Degree of financial leverage
Earnings before interest and taxes/ earnings before taxes
The degree of financial leverage is the factor by which net income will change with a change in earnings before interest and taxes. This degree of financial leverage indicates the leverage factor for recurring earnings.
Earnings per share
(Net Income-Preferred dividends)/ Weighted average number of common shares outstanding
Price/earnings ratio
Market price per share/ Diluted earnings per share
This statistic indicates the investment potential of an enterprise; a rise in this ratio indicates that investors are pleased with the firm’s opportunity for growth.
Dividend payout ratio
Dividends per common share/ Diluted earnings per
This ratio indicates the portion of current earnings being paid out in dividends
Dividend yield
Dividends per common share/ Market price per common share
This ratio indicates the relationship between dividends and market priced
Book value per share
(Total stockholders’ equity - Preferred stock)/ Number of common shares outstanding
This ratio indicates the amount of stockholder’s equity that relates to each share of common stock. Note that preferred stock should be stated at liquidity value if other than book value
Debt/Equity
Total liabilities/ common stockholders’ equity
This ratio indicates the degree of protection to creditors in case of insolvency. The lower this ratio the better the company’s position.
Debt ratio
total Liabilities/ Total Assets
This debt ratio indicates that more than half of the assets are financed by creditors
Times interest earned
earnings before taxes and interest/ Interest
This ratio reflects the ability of a company to cover interest charges. It uses income before interest and taxes to reflect the amount of income available to cover interest expense.
Operating cash flow/ Total debt
Operating cash flow/ Total debt
This ratio indicates the ability of the company to cover total debt with yearly cash flow.
