Ratios

Question 1

Current Ratio (Liquidity)

Answer 1

CA/CL

This ratio is frequently used as a measure of liquidity. Many analysts use a minimum value of 2 when evaluating firms because the extra CA provides a buffer for uncertainty, and CA includes inventories and prepaids that are not considered very liquid.

Question 2

Quick/Acid-Test Ratio (Liquidity)

Answer 2

(cash +- short term investments +- AR)/CL

this should be at least 1.00. This ratio provides a more rigorous test of liquidity.

Question 3

Basic Categories

Answer 3

Liquidity/Solvency - measures ability to meet maturing obligations

Operational - Measures the efficiency of operations

Profitability - measures operational results

Equity - Measures the sources of equity

Question 4

Working Capital

Answer 4

CA-CL ($)

Question 5

Current Ratio

Answer 5

CA / CL

>1 = (+) more assets than liab
<1 = (-) More liab than assets

Question 6

Quick/Acid Ratio

Answer 6

Cash + A/R + Marketable Securities
_______________________________
Current Liabilities

*Always LESS than the Current Ratio

Question 7

Times Interest Earned

Answer 7

l-t solvency

NI + Int. Exp. + Inc. Tax Exp.
_____________________
Interest Expense

Question 8

A/R Turnover/ Days in A/R

Answer 8

Net Credit Sales
_________________
Avg A/R

365/AR Turnover

Question 9

Inventory Turnover

Answer 9

COGS
_________________
Avg Inventory

365/Inventory Turnover

Question 10

COGS

Answer 10

Beg Inv + Purchases - End Inv

Question 11

Days in Operating Cycle

Answer 11

Number of days’ sales in inventory 61
+
Number of days’ sales in trade accounts receivable 33

Question 12

Profit Margin (%)

Answer 12

NI / Sales

Net profitability on sales (%)

amount of profit generated per $ of sales

Question 13

ROA - Return on Assets (%)

Answer 13

NI / Avg. TA

Measures the rate of return on total assets
How effectively TA generate NI

Question 14

ROE - Return on Equity (%)

Answer 14

NI / Avg. Common s/h Equity

Measures the rate of earnings on common s/h equity

15.38% return = for every $ of CSE, 15 cents of NI is produced

Question 15

EPS - Earnings Per Share

Answer 15

NI - Preferred Dividends
_____________________________________
Weighted Avg. Common Shares Outstanding

Measures the income per share of common stock

100/500 = .20; so for each share of cs, there is .20 of NI

Question 16

Price Earnings Ratio (times)

Answer 16

Stock Price per Share / EPS

Measures the price of stock relative to its EPS; indicates how the market values the stock (future); while EPS is looking at past performance

“market has priced stock at 12.5 times its earnings”
future potential is significantly better than past performance

Question 17

leverage Measurements

Answer 17

L/E
E/A
L/A

Question 18

Debt to Equity

Answer 18

TL / TSE
a = l + e
100 = 60 + 40
60/40
= 150% = 1.5 times E (liab 1.5 more than equity)

Question 19

Equity to assets

Answer 19

SE / TA
a = l + e
100 = 60 + 40
40/100 = 40% 
40% of assets are financed by equity

Question 20

Debt to Assets

Answer 20

TL / TA
a = l + e
100 = 60 + 40
60/100 = 60%
60% of assets are financed by liabilities