Ratios Flashcards
Asset turnover ratio
Measures how efficiently a business uses its assets to produce sales
A higher ratio is better than a lower
Net sales/ (avg total assets (beginning assets + end assets)/ 2)
Activity ratios-
Measures how productive a particular asset was in producing sales activity
Accounts receivable turnover
Measures frequency which cash receivables are converted to cash
Higher turnover provides faster access to cash that can be use in the business.
Net credit sales/avg net accounts receivable
Inventory turnover ratio
How quickly inventory is sold and thus the relative efficiency of both the sales and purchasing functions.
Higher turnover is preferred
COGS/Avg merchandise inventory
Avg holding period
Indicates the same as inventory but easier to understand
Shorter period is preferred
365/inventory turnover ratio
Profitability ratios-
Measures management effectiveness in creating wealth from sales and from invested funds
gross margin ratio
Measures the % of sales revenue available to pay operating costs and to provide after paying for inventory
Higher is preferred
Gross margin/sales revenue
Profit margin ratio (aka return on sales)
Measures managements effectiveness in managing all costs relative to sales
Higher is preferred
Net income/sales revenue
Return on equity
Measures managements effectiveness in using investor funds to provide profits
Higher is preferred
(Net income - preferred stock dividends declared)/avg common stockholders equity
ROA return on assets (sometimes this is the same as ROI
Measures managements effectiveness in using the assets of the business to provide profits
Higher is preferable
Net income/avg total assets
Return on investment
Measures managements effectiveness in using the invested capital of the business to provide profits
Higher is preferred
Net income/avg investment
Eps earnings per share
Measures profitability per share investment
Examined over time, a trend of increasing earnings per share earnings is preferred
(Net income - preferred stock dividends declared)/weighted avg common stock outstanding
Liquidity ratios-
Measure the business’ ability to pay debts and expanses that are due in the current accounting period
Current ratio
Measures how much money can be made available to pay obligations within the fiscal year.
Higher ratio is preferred
Current assets/current liabilities
Acid test or quick ratio
Measure of how much money can be made available bee quickly to pay obligations within the fiscal year
Higher ratio preferred
(Current assets - inventories +prepaid assets)/current liabilities
Leverage ratios
Measures that indicate the relative risk that a business setback could cause bankruptcy.
Debt to assets ratio
Measures the extent to which the business can meet its obligations for the long haul
A lower ratio indicates greater solvency . A greater ratio indicates increased business risk.
Total liabilities/total owners equity
Times interest earned
Measures the risk of being forced into bankruptcy for not meeting requires interest payments. A coverage ratio that can be used to cover interest expenses in the future
Higher is preferred
Operating income before interest and income tax/interest expense
Du point analysis
Return on equity = profit margin x total asset turnover x Financial leverage
Financial leverage
Total assets/total equity
P/E ratio
Price earnings ratio= market price per share/eps
