Ratios module 4 Flashcards
5 categories of ratios
- profitability
- liquidity
- debt ratios
- market ratios
- efficiency ratios
- activity ratios
benchmarking
the key to ratio analysis
comparing ratios to something that is meaningful (ratio vs ratio)
trend analysis
looking at how ratios change over time
profitability ratios
measure the company’s use of assets and expenses to generate a return thats acceptable to its shareholders
liquidity ratio
measure how much cash is available for the company to pay its debt
- quick ratio
- current ratio
quick ratio (acid test ratio)
can the company pay its short term debts? excluding inventory
current ratio
can the company pay its short term debts using short term assets
current assets > current liabilities = good
debt ratio
measures the firms ability to pay its long term debts
market ratio
measure the return and the value of the company’s stock and cost of issuing that stock
efficiency ratio
measure how efficient is the company in using its assets to generate sales
activity ratio
used to gauge the ability of a business to convert asset liability and capital account into cash or sales
types of profitability rarios
- operating margin
- gross proft margin
- net profit margin
- return on Total assets
- Return on equity
ROE
how effective is the company in using its equity to generate profits
percentage of sales
used by companies to develop forecasted income statement and balance sheets by using the % of growth forecasted in sales and apply that growth to a spontaneous account
spontaneous account
any account on the income statement or balance sheet that changes as sales changes
