Ratios Flashcards
Economic Value Added (EVA)
net income less a charge for the capital employed to produce that income (NI - % x equity)
Cost of Equity Capital (r)
the opportunity cost shareholders have in investing in other firms of similar risk and earning a return on their investment. Stock prices reflect expectations about the firm’s profitability spread.
Accounting Profit: Return on Equity
Net Income/Net Worth
Spread
ROE - Cost of Equity Capital (R)
Operating Efficiency
earnings squeezed out of each dollar of sales;= NOPLAT / Sales
Asset Turnover
Sales/Total Assets; sales generated from each dollar of assets; measures the asset intensity of a business, the quantity of assets it needs to generate a dollar of sales. Firms with low margins need high asset turnovers to compensate.
Financing decisions
assets leveraged by each dollar of equity
ROE (Dupont Formula)
ROE = Net Income / SE = Profit Margin x Asset Turnover x Financial Leverage
Profit Margin
Net Income / Sales; the earnings squeezed out of each dollar of sales; measures the fraction of each dollar of sales that trickles down through the income statement to profits.
Financial Leverage
Assets / SE; the amount of equity used to finance the assets
Firms’ objecitve
create value for shareholders
CF
Cash Flow
FCF
free cash flow
r
capital charge
Balance Sheet
reflects the state of the company at a point in time; makes a statement about the resources a company uses to operate and how those resources were paid for (uses/sources; investment/financing)- snapshot of a point in time
Assets
Current Assets: Cash, Marketable Securities, Receivables, Inventories. Fixed Assets: PP&E, net
Liabilities
Current Liabilities: Notes Payable, Accounts Payable, Accrued Expenses, Accrued Taxes. Long-term Liabilities: Long-term Debt
Shareholders’ Equity
Common Stock, Retained Earnings
Automatic Sources
Interest bearing debts
Market Value
price per share
Book Value
SH equity / # shares outstanding
investment
typically regarding assets; the allocation of current funds for a stream of future benefits: working capital managment and capital budgeting
financing
typically regarding liabilities and equity; the acquisition of funds to support current investments (capital structure, term structure, divdend policy)
Cash Account
Cash boy + Cash Received - Cash Payments = Cash eoy
A/R Account
A/R boy + Sale - Collections = A/R eoy
PP&E Account
PP&E boy + CAPEX - Depreciation - Disposals = PP&E eoy
Inventory Account
Invy boy + Purchases - COGS = Invy eoy
Accrued Liabilities
AL boy + Incurred Exp - Prepayment = AL eoy
Income Tax Payable (Accured Tax)
AT boy + Provision Exp - Pymts to IRS = AT eoy
Long-term Debt
LTD boy + Borrowings - Repayment of Principal = LTD eoy
Accounts Payable
AP boy + Raw Material Purchases - Pymts = AP eoy
Retained Earnings
Prior years’ SE + NI - Dividends + common stock issued - stock repurchases where NI - dividends = retained earnings
Common Stock
CS boy + Issuance of stock - Repurchases = CS eoy
Net Working Capital
Current Assets - Automatic Sources; current assets - non-interest bearing current liabilities
Debt
all interest-bearing liabilities: Short-term Debt and LTD
Net Fixed Assets
Gross Fixed Assets (CAPEX) - Accum Depr
Income Statement
reflects the operations of a company (Rev -Exp) over a period of time. Net income is the “bottom line”; makes a statement about how the company is using its resources to generate profit (or loss) - snapshot of a period of time
Cash Flow Statement
Reflects the sources and uses of cash of a company over a period of time; measures solvency, or cash available to pay upcoming bills; makes a statement about how a company has used or received cash in the period. - snapshot of a period of time
Accural Accounting
Recognizes revenue as soon as “the effort required to generate the sale is substantially complete and there is a reasonable certainty that payment will be received.” Profits do NOT equal cash.
Cash Flow
- the movement of cash into and out of an account over a period of time- the “bottom line” of a cash flow statement is to reconcile the change in cash over the relevant period- a company generates cash by reducing an asset or increasing a liability; it uses cash by increasing an asset or reducing a liability
Derivation of Cash Flow
‘îCash + ‘îWorking Current Assets + ‘îNet Fixed Assets = ‘îAutomatic Sources + ‘îDebt + ‘îCommon Stock + ‘îRERecall, ‘îNFA = CAPEX - Depr‘îWorking Capital = ‘îWCA - ‘îAS‘îRE = NI - Div Solving for cash:‘îCash = NI + [Depr - ‘îWC] - [CAPEX] + [‘îDebt + ‘îCS - Div] = NI + [Adjustments] - [CF f Investing] + [CF f Financing]
Gross Margin
Gross profit / Sales; measures the amount every sales dollar is available to pay for fixed costs and to add to profits.
Inventory Turnover
COGS / Ending Invy;
Debt Ratio
Total Liabilities / Total Assets
Growth and Trend Analysis
measures how the company is performing relative to the overall economy, including inflation, and to the company’s competitors
Leverage Ratios
Measure the extent of debt financing by the company- Debt ratio- Times interest earned
Liquidity Ratios
measure of company’s ability to meet its upcoming short-term obligations. Include: current ratio, quick ratio, cash ratio.
Cash Ratio
(Cash + securities)/Current Liabilities
Efficiency Ratio
measures how well a company is using its assets. Include: days in invy, collection period, accounts payable DOH, Asset turnover, fixed asset turnover
Invy Days-on-hand
Ending Invy / (COGS per day)
Invy Turnover
COGS/Ending Invy
Receivables Turnover
Credit Sales / AR
How to measure how quickly a company is paying its bills? (Accounts Payable days-on-hand)
Accounts Payable / (Credit Purchases per day)If purchases are unavailable, use COGS
Fixed Asset Turnover
Sales / Net PP&E
Profitability Ratios
measure how effectively management is operating the business. Include: net profit margin, gross margin, operating margin, ROA, ROE, Return on Invested Capital
Net profit margin
Net Income / Sales
Gross Margin
Gross profit / sales
Operating Margin
EBIT / Sales
Return on assets
Net Income / Assets
(Interest bearing) Debt to Capital
Debt / (Debt + NW)
Times Interest Earned
EBIT / Interest
EBIAT
Earnings before interest after taxes; aka net operating profit less adjusted taxes; the after-tax earnings of the firm as if it were all-equity financed, i.e., if interest = 0.= EBIT x (1 - tax rate)
Current and Quick Ratio
these ratios measure liquidity, i.e., to what extent a company has access to sufficient cash to meet all of its ongoing needs.
Margins
these ratios measure the firm’s value added. Firms such as retail stores that add little value to their inputs will work on thin margins, while firms such as chip manufacturers that greatly transform their inputs enjoy much larger margins.
A company generates cash by _______ an asset or _______ a liability; it uses cash by ________ an asset or ______ a liability
Reducing , Increasing.Increasing , Reducing
Net Income vs Cash
- a company can be profitable sans adequate cash- a company can produce lots of products wo having adequate cash: the products become invy until they are sold; production results in cash expenses, but expenses are not changed until an item is sold. - A company can have healthy sales sans adequate cash: sales create receivables, which are turned into cash only upon collection. - Rapid growth doesn’t necessarily result in lots of cash because growth requires invy, fixed asset investment, etc.
Acid Test or Quick Ratio
[Current assets - Invy] / Current Liabilities
Income Statement
Sales -COGSGross Profit-R&D Expense-SG&A ExpenseEBIT-Interest Expense Profit before tax-Income TaxNet Income
The tax rate is found by:
Income Tax / Profit before tax
Net Fixed Assets Turnover
Sales / NFA
Interest Coverage
EBIT / Interest
Debt Ratio at market
Total Liabilities / (Total Liabilities + MV Equity)
Capital Turnover
aka capital managment = Sales / capital
Sustainable Growth - how fast can a firm grow wo increasing its debt ratio?
Answer: As fast as its equity is growing organically. Increase in NW = ‘îRE = b x NIGrowth rate of NW = b x NI/NW = b x ROENotes:- To maintain D/E ratio, Debt and NW must both grow at same rate g- If growth g > sustainable growth rate the firm must: Issue new equity so as to maintain D/E ratio, grow more slowly, allow its D/E to rise.
The Accrual Method
revenue is recognized when earned and expenses are recognized when incurred without regard to the timing of cash receipts and expenditures
Maturity of Debt
Short term (commercial paper)Medium term (bank loans, medium term paper)Long term (bonds)
