Ratios

Question 1

Liquidity ratios

Answer 1

Liquidity ratios are measures of a firms short-term ability to pay maturing obligations

Question 2

Activity ratios

Answer 2

Activity ratios are measures of how effectively an enterprise is using its assets

Question 3

Profitability Ratios

Answer 3

Profitability ratios measure the financial performance of an enterprise for a given time period

Question 4

Investor Ratios

Answer 4

Investor ratios are measures that are of interest to investors

Question 5

Long-term Debt-Paying ability ratios(Coverage ratios)

Answer 5

Coverage ratios are measures of security for long-term creditors/investors

Question 6

Working Capital Formula

Answer 6

Current assets- Current Liabilities

Question 7

Current ratio(working capital ratio)

Answer 7

Current assets/current Liabilities

Ability to meet short term obligations

Question 8

Acid-test ratio

Answer 8

(Cash equivalents + Marketable Securities + Accounts Receivable)/ Current Liabilities

Ability to meet short term needs

Question 9

Cash ratio

Answer 9

(Cash equivalents + Marketable Securities)/ Current Liabilities

Question 10

Accounts receivable turnover

Answer 10

Net credit sales/Average net receivables

The ability to successfully collect outstanding receivables. Faster turnover gives credibility to the current and acid-test ratios

Question 11

Accounts receivable turnover in days

Answer 11

365/Receivable turnover

Average number of days to collect accounts receivable

Question 12

Inventory turnover

Answer 12

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

Question 13

Inventory turnover in days

Answer 13

365/Inventory turnover

Indicates the average number of days required to sell inventory

Question 14

Operating cycle

Answer 14

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.

Question 15

Working Capital Turnover

Answer 15

Sales/Average working capital

This ratio indicates how ieffectively working capital is used

Question 16

Total asset turnover

Answer 16

Net Sales/ Average total assets

Indicator of how effective use of its assets. High ratio indicates effective asset use to generate sales

Question 17

Accounts payable turnover

Answer 17

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

Question 18

Days in accounts payable

Answer 18

365/Accounts payable turnover

this ratio indicates the average length of time trade payables are outstanding befor year end.

Question 19

Net Profit Margin

Answer 19

Net Income/Net Sales

This ratio indicates profit rate, when used with the asset turnover ratio, indicates rate of return on assets.

Question 20

Return on total assets

Answer 20

Net income / Average total assets

Question 21

Return on assets

Answer 21

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.

Question 22

return on Investment

Answer 22

(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

Question 23

Return on Common Equity

Answer 23

(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.

Question 24

Net operating margin percentage

Answer 24

Net operating income/ Net Sales

Question 25

Gross(Profit) margin percentage

Answer 25

Gross (profit) margin/ Net Sales

Question 26

Operating Cash flow per share

Answer 26

Operating cash flow/ Common shares outstanding

Question 27

Degree of financial leverage

Answer 27

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.

Question 28

Earnings per share

Answer 28

(Net Income-Preferred dividends)/ Weighted average number of common shares outstanding

Question 29

Price/earnings ratio

Answer 29

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.

Question 30

Dividend payout ratio

Answer 30

Dividends per common share/ Diluted earnings per

This ratio indicates the portion of current earnings being paid out in dividends

Question 31

Dividend yield

Answer 31

Dividends per common share/ Market price per common share

This ratio indicates the relationship between dividends and market priced

Question 32

Book value per share

Answer 32

(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

Question 33

Debt/Equity

Answer 33

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.

Question 34

Debt ratio

Answer 34

total Liabilities/ Total Assets

This debt ratio indicates that more than half of the assets are financed by creditors

Question 35

Times interest earned

Answer 35

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.

Question 36

Operating cash flow/ Total debt

Answer 36

Operating cash flow/ Total debt

This ratio indicates the ability of the company to cover total debt with yearly cash flow.