Ratios Flashcards
Gross Margin
Gross Profit/
Net Sales
OP
= 1 - (COGS/ Net Sales)
(Decimal)
Profit Margin Ratio
Return on Sales
Net Income/
Net Sales
OP
Efficiency
(Decimal)
Asset Turnover Ratio
Net Sales/
Average Total Assets
OP
Asset efficiency, though high value could reflect low investment in PP&E and high value could reflect recent investment not yet at capacity
Return on Assets
(ROI)**
Net Income/
Average Total Assets
OP
= (Net Income/ Sales) * (Sales/ Avg Total Assets) = Profit Margin * Asset Turnover
(Decimal)
Return on Equity
Net Income/
Average SH Equity
OP
How much income earned for every investor $
Earnings Per Share
Net Income
(- preferred div)/
Avg # Com Shares
OP
More specific return to SH and ability to finance growth internally; component to P/E ratio
Price-Earnings Ratio**
Market Price Per Sh/
Earnings Per Share
OP
How much investors willing to pay in excess of earnings
Payout Ratio
Dividends/
Net Income
OP
(Decimal)
Times Interest Earned
EBIT/
Interest
OP
Reflects ability to meet interest payment obligations; misleading AR - may not have cash
Working Capital
Current Assets -
Current Liabilities
LIQ
Ability to meet short-term obligations; excess cash after short-term obligations met
Current Ratio
Current Assets/
Current Liabilities
LIQ
Buffer of liquidity; better for comparisons; liability coverage
Quick Ratio
Acid-test Ratio
Cash etc + AR /
Current Liabilities
LIQ
More immediate liquidity buffer than Current Ratio; excl. inventory and prepaid expenses (harder to convert to cash)
Receivables Turnover
Net [Credit] Sales/
Average AR
LIQ
How fast AR converted to cash; literally # times per year
Days Sales Outstanding
365/
Receivables Turnover
LIQ
Average days to turn over
Inventory Turnover
COGS/
Avg Inventory
LIQ
How fast inventory sold/replaced
