Ratios/Formulas Flashcards
Capital Budgeting 1
Cash Inflow pre-tax - Depreciation on investment = Increase in Tax Income - Tax = Increase in accounting net income Cash inflows before tax - Tax = After tax net cash inflows
Capital Budgeting 2
Increase in accounting net income + depreciation on investment = After tax net cash inflows
Payback method
Initial Investment / After Tax net cash inflows = Payback Period
Accounting Rate of Return
Increase in accounting net income / Investment = Accounting rate of return
Internal Rate of Return
Initial Investment / After tax cash inflows = Present value factor
Net Present Value
After tax new cash inflows x present value factor for annuity at target rate = Present value of investment - Initial investment = NPV
Inventory conversion period (ICP)
- ICP = Average inventory / Cost of sales per day
- Average inventory = (Beginning inventory + Ending inventory) / 2
- Assume 365 days in a year unless told otherwise
Receivables collection period (RCP)
RCP = Average receivables / Credit sales per day
Payables deferral period (PDP)
PDP = Average payables / Purchases per day
Cash conversion cycle (CCC)
CCC = ICP + RCP – PDP
Economic Order Quantity (EOQ)
EOQ = √2AP/S A = Annual demand in units P = Cost of placing an order or beginning a production run S = Cost of carrying one unit in inventory for one period
Reorder point
Average daily demand × Average lead time = Reorder point
Safety stock
Maximum daily demand × Maximum lead time – Reorder point = Safety stock
Operating leverage
% change in operating income / % change in unit volume = Degree of operating leverage
Financial leverage
% change in earnings per share / % change in earnings before interest and taxes = Degree
of financial leverage
Debt YTM
Yield to maturity × (1 – Effective tax rate)
DEBT 2
(Interest expense – Tax deduction for interest) / Carrying value of debt
Capital asset pricing model (CAPM)
CAPM = Beta × Excess of normal market return
over risk-free investments + Normal return on risk-free investments
Return on Investment (based on assets)
Net income / Total assets
DuPont return on investment (ROI) analysis
ROI = Return on sales × Asset turnover
Return on sales
Net income / Sales
Asset turnover
Sales / Total assets
Residual income
Operating profit – Interest on investment
Interest on investment
Invested capital × Required rate of return
Economic Value Added
Net operating profit after taxes (NOPAT) – Cost of financing
Cost of financing
(Total assets – Current liabilities) × Weighted-average cost of capital
WACC
% of Debt x Effect Cost of Debt + %Preferred Stock x Effective Cost of PS + % Common Stock x Effective cost of CS
Free Cash Flow
NOPAT + Depreciation + Amortization – Capital expenditures – Net increase
in working capital
Gross Margin
Gross profit / Net sales
Operating Profit Margin
Operating profit / Net sales
Return on Assets
Net income / Average total assets
Average total assets
(Beginning total assets + Ending total assets) / 2
Return on Equity
Net income / Average common stockholders’ equity
Common stockholders’ equity
Stockholders’ equity – Preferred stock liquidation value
Receivable Turnover
Net credit sales / Average accounts receivable
Average accounts receivable (A/R)
(Beginning A/R + Ending A/R) / 2
Receivables Collection Period
Average accounts receivable / Average credit sales per day
Inventory Turnover
Cost of goods sold / Average inventory
Inventory Conversion Period
Average inventory / Average cost of goods sold per day
Fixed Asset Turnover
Sales / Average net fixed assets
Total Asset Turnover
Sales / Average total assets
Current Ratio
Current assets / Current liabilities
Quick (or Acid Test) Ratio
Quick assets / Current liabilities
Quick assets
Cash + Marketable securities + Accounts receivable
Debt to Total Assets
Total liabilities / Total assets
Debt to Equity Ratio
Total debt / Total equity
Times Interest Earned Ratio
Earnings before interest and taxes / Interest expense
Price/Earnings (PE) Ratio
Common stock price per share / Earnings per share
Book Value per Share
Common stock equity / Common stock shares outstanding
Common stock equity
Stockholders’ equity – Preferred stock liquidation value
Market Capitalization
Common stock price per share × Common stock shares outstanding
Market/Book Ratio can be calculated in two ways
- Common stock price per share / Book value per share
2. Market capitalization / Common stock equity
