Ratios Flashcards
What is working capital?
Working capital = Current Assets - Current Liabilities
The ratio which helps with working capital is: Current ratio
Working capital ratio = current assets/current liabilities
What do liquidity/solvency ratios measure?
They measure the ability of the firm to pay its obligations as they become due.
Would equal increases in current assets and current liabilities keep the ratio unchanged?
NOPE! Do the math. Don’t fall for this trick in the CPA exam.
Acid test ratio or quick ratio looks like what?
Cash + net receivables + marketable securities / current liabilities
A/R turnover ratio
(Net) credit sales / average (net) a/r
Average A/R= (Beg. Bal. + End. Bal.)/2
And then
300 or 360 or 365 / a/r turnover
To see how many days it takes the firm to receive its receivables
Inventory turnover ratio
COGS/Avg. Inventory
And then
300 or 360 or 365 / inventory turnover
To find out how many days it takes the firm to sell the inventory
Securities Defensive-Interval Ratio: what is it and what’s it look like?
(Cash + Net Receivables + Marketable Securities)/Average Daily Cash Expenditures
It measures the quantitative relationship between highly liquid assets and the average daily use of cash in terms of number of days that cash and assets can be quickly converted to support operating costs.
Times interest earned ratio
(Net income + interest expense + income tax)/interest expense
Measures the ability of current earnings to cover interest payments for a period.
Times Preferred Dividend Earned Ratio
Net Income / Annual Preferred Dividend Obligation
What do operational activity ratios measure?
They measure the efficiency with which a firm carries out it’s operating activities.
Operating number of cycle = Days in Operating.
Number of days’ Sales in A/R + Length Cycle number of days’ Supply in inventory
It measures the time to go from cash back to cash.
Working Capital Ratio or WCR or Current Ratio Relationships
If WCR exceeds 1.00:
Equal increases in CAs and CLs decrease the WCR.
Equal decrease in CAs and CLs increase the WCR.
If WCR is less than 1.00:
Equal increases in CAs and CLs increase the WCR.
Equal decrease in CAs and CLs decrease the WCR.
What do profitability ratios measure?
They measure aspects of a firm’s operating (income / loss) results in a relative basis.
Profit Margin (on sales) ratio
Net income / net sales
Measures the bet profitability on sales (revenue)
Return on total assets ratio
(Net Income + (add back) Interest Expense (net of tax effect)) / Average total assets
Measures the rate of return on total assets and indicates the efficiency with which invested resources (assets) are used.
Return on common stockholders’ equity ratio
(Net Income - Preferred Dividend (obligation for the period only)) / Avg. Common Stockholders’ Equity
Measures the rate of return on (earnings) on common stockholders’ investment
Return on Owners’ (all stockholders’) equity ratio
Net Income / Avg. Stockholders’ Equity
Measures the rate of return on all stockholders’ investments
Price-Earnings Ratio
Mkt. price for common share / EPS
Total Basis Ratio
Cash Dividends to Common Shareholders / Net Income to Common Shareholders
Per Share Basis Ratio
Cash Dividend Per Share / Earnings per Common Share
Common Stock Yield Ratio
Dividend per Common Share / Mkt. Price per Common Share
What do Equity/Investment Ratios measure?
They measure relative sources of equity and equity value
Debt to Equity Ratio
Total Liabilities / Total Shareholders’ Equity
Measures relative amounts of assets provided by creditors and shareholders
Owners’ Equity Ratio
Shareholders’ Equity / Total Assets
Measures the proportion is assets provided by shareholders
Debt to asset ratio
Total liabilities / Total assets
Book value per common stock ratio
Common shareholders’ equity / number of outstanding common shares
Measures the per share amount of common shareholders’ claim to assets.
Book value per preferred share ratio
Preferred shareholders’ equity (including dividends in arrears) / number of outstanding preferred stocks
Measures the per share amount if preferred shareholders’ claim to assets
Successful use of leverage is evidenced by a?
Rate of return on investment greater than the cost of debt.
Dividend Payout Ratio
Common Dividend / Net Income
