Ratios

Question 1

working capital

Answer 1

current assets- current liabilities

• the capital of a business that is used in it day-to-day trading operations
• liquidity ratio

Question 2

current ratio

Answer 2

current assets/current liabilities

• measures a company’s ability to pay short term and long term assets
• dont want this less than 1 (means working capital is negative) but also don’t want too high (could mean they have a lot of inventory)
• liquidity ratio

Question 3

inventory turnover

Answer 3

COGS/average inventory

• shows how many times inventory is sold and replaced within a given period of time
• want this to be high (strong sales)
• liquidity ratio

Question 4

days in inventory

Answer 4

365/inventory turnover

• measures the average number of days that a company holds its inventory before selling it
• want this low-selling items quickly
• liquidity ratio

Question 5

accounts receivable turnover

Answer 5

net credit sales/average net accts receivable

• the number of times a year a company collects its average accounts receivable
• want this high (means they are more likely to collect)
• liquidity ratio

Question 6

average collection period

Answer 6

365/accounts receivable turnover

• the average number of days it takes to collect accounts receivable
• want this low (means you collect them quickly)
• liquidity ratio

Question 7

debt to assets ratio

Answer 7

total liabilities/total assets

• tells you the % of total assets that is financed by creditors
• you want this low (less liabilities to pay off)
• solvency

Question 8

times interest earned

Answer 8

(net income + income tax expense+ interest expense)/interest expense

• measures a company’s ability to meet its debt obligations
• want this higher (less of a risk to creditors in terms of solvency)
• not expressed as a percent
• solvency

Question 9

free cash flow

Answer 9

net cash provided by operating activities-capital stock-cash dividends
-the money the company generates after paying off what it owes
-high is good
solvency

Question 10

earnings per share

Answer 10

net income-preferred dividends/weight average shares outstanding

• profitability
• the amount you make per share
• you want this to be high

Question 11

price earnings ratio

Answer 11

market price per share/earnings per share

• profitability
• how much investors are willing to pay per dollar of earnings (if it is 20 they are willing to pay $20 per $1 of earnings that the co generates)
• better indicator of the value of stock
• if higher than the market value this suggests the market is expecting big things over the next few months or years

Question 12

gross profit rate

Answer 12

gross profit/net sales

• profitability
• measures the portion of all sales that are kept as profit (money left as revenues after accounting for COGS)
• want this to be high

Question 13

profit margin

Answer 13

net income/net sales

• profitability
• measure the amount of net income earned with each dollar of sales generated by the company
• want this high

Question 14

return on assets

Answer 14

net income/average total assets

• profitability
• measures the percentage of profit earned in relation to overall resources

Question 15

asset turnover

Answer 15

net sales/average total assets

• the ratio of the value of a company’s sales relative to the value of its assets
• indicator of the efficiency with which a company is using its assets
• higher is better

Question 16

payout ratio

Answer 16

cash dividends declared on common stock/net income

• profitability
• determines the sustainability of a company’s dividend payments (what % of a company’s income is paid out as dividends)

Question 17

return on common stockholders equity

Answer 17

net income-preferred dividends/average common stockholders equity

• profitability
• shows how much profit each dollar of common SHE generates
• want this high