Section 3 - Ratios Flashcards
Working Capital
Formula & Purpose or Use?
(Liquidity Ratio)
Current Ratio
Formula & Purpose or Use?
(Liquidity Ratio)
Quick or acid-test ratio
Formula & Purpose or Use?
(Liquidity Ratio)
Current cash debt coverage ratio
Formula & Purpose or Use?
(Liquidity Ratio)
Receivable Turnover
Formula & Purpose or Use?
(Liquitidy Ratio)
Avg. Accounts Receivable = (Beg. A/R + Ending A/R) / 2
Inventory Turnover
Formula & Purpose or Use?
(Activity Ratio)
Asset Turnover
Formula & Purpose or Use?
(Activity Ratio)
Number of Days ‘ supply average inventory
Formula & Purpose or Use?
(Activity Ratio)
Number of Day’s Sales in Average Receivables
Formula & Purpose or Use?
(Activity Ratio)
Profit Margin on Sales (Gross Margin)
Formula & Purpose or Use?
(Profitability Ratio)
Rate of Return on Assets
Formula & Purpose or Use?
(Profitability Ratio)
Rate of Return on Common Stock Equity (Return on Equity)
Formula & Purpose or Use?
(Profitability Ratio)
Earnings Per Share
Formula & Purpose or Use?
(Profitability Ratio)
Price-Earnings Ratio
Formula & Purpose or Use?
(Profitability Ratio)
Payout Ratio
Formula & Purpose or Use?
(Profitability Ratio)
Debt to Equity
Formula & Purpose or Use?
(Coverage Ratio)
Debt to Total Assets
Formula & Purpose or Use?
(Coverage Ratio)
Times interest Earned
Formula & Purpose or Use?
(Coverage Ratio)
Cash Debt Coverage Ratio
Formula & Purpose or Use?
(Coverage Ratio)
Book Value Per Share
Formula & Purpose or Use?
(Coverage Ratio)
Formula: Gross Margin
Gross Profit / Net Sales
Formula: Operating Profit Margin
Operating Profit / Net Sales
Formula: Free Cash Flow
Net operating profit after taxes (NOPAT)
+ Depreciation
+ Amorization
- Capital Expenditures (CAPEX)
- Net Increase in Working Capital
Formula: Residual Income
Operating Profit - Interest on Investment
Interest Investment = Invested Capital x Required Rate of Return
Formula: Economic Value Added
EVA = Net Operating Profit After Taxes (NOPAT) - Cost of Financing
Cost of Financing = (Total Assets - Current Liabilities) x WACC
Formula: Economic Rate of Return on Common Stock (Total Return)
( Dividends + Change in Price ) / Beginning Price
Formula: Return on Investment (Based on Assets)
Net Income / Total Assets (or Average Invested Capital)
Formula: DuPont ROI analysis
ROI = Return on Sales x Asset Turnover
Return on Sales = Net Income / Sales
Asset Turnover = Sales / Total Assets
Formula: Return on Assets
Net Income / Average Total Assets
Average Total Assets = (Beg. Total Assets + Ending Total Assets) / 2
Formula: Return on Equity
Net Income / Avg. Common Stockholder’s Equity
Avg. Common Stockholder’s equity = Stockholder’s Equity - Preferred Stock Liquidation Value
Formula: Fixed Asset Turnover
Sales / Average net fixed assets
*Remember that net fixed assets is after subtraction of accm. depreciation
Formula: Market Capitalization
Common Stock Price per share x Common Stock Shares Outstanding
Formula: Market/Book Ratio
Can be calculated in two ways:
- Common Stock price per share / Book Value per share
- Market Capitalization / Common Stockholder’s Equity
Cash Conversion Cycle (CCC)
- Formula?
- What does it meausure?
- What is management’s goal for CCC?
- What is the meaning of a large CCC?
- Formula:
ICP (Inventory Conversion Period)
+ RCP (Accounts Receivable Collection Period)
- PDP ( Accounts Payable Deferral Period)
= CCC
- It measures the # of days from when a busines pays for its inputs to then the business collects cash from the resulting sales of finshed goods.
- Shorten CCC to minimize their need for financing
- A large CCC would mean that the business needs to use more financing
Formula =
Inventory Converion Period (ICP)
- Formula?
- What does it measure?
- ICP = Average Inventory / Cost of Goods per day (or Sales per day)
Avg. Inventory = (Beg. Inventory + End. Inventory ) / 2
- The average of number of days required to convert inventory to sales
Accounts Receiable Collection Period (RCP)
- Formula?
- What does it measure?
- Average Accounts Receivable / Average Credit sales per day
- the average number of days required to collect account receiable
Accounts Payable Deferral Period (PDP)
- Formula?
- What does it measure?
- Average Payables / Purchases per day (or COGS / 365)
- the average numbers of days b/w buying inventory and paying for that inventory
Economic Order Quantity (EOQ)
- Formula?
- What does it measure?
- How much you should order or purchase?
Formula =
Formula: Reorder Point
Payback Period
- Formula?
- What does it measure?
- Disavantages? (2)
- the length of time it takes for an initial cash outlay for the investment to be recovered in cash
- It does not take into account (1) project’s total profitability or (2) Time value of Money
Formula =
Internal Rate of Return
- Formula
- What does it measure?
- Advantages? (3)
- Disadvantages? (2)
- the discount rate at which the net present value is zero. (alternatively, the rate of interest that equates the present value of cash outflows & the present value of cash inflows)
- (1) Adjusts for the time value of money; (2) The hurdle rate is based on market interest rates for smiliar investments; (3) the results tend to be a little more intuitive than the results of the net present value method
- (1) There may be no unique internal rate of return for a particular project ( or there may be multiple returns) (2) theyre may be no real discount rate that equates the project’s NPV to zero
Formula =
Accounting Rate of Return
- Formula?
- What does it do?
- Advantages?
- Disadvantages? (3)
- computes an approximate rate of return that does not take into account the time value of money and does not use actual cash flows
- Easy to compute & understand
- (1) Does not take into account the time value of money (2) Does not take into account differences in risk across investments (no project risk) (3) results are affected by the depreciation method used
Formula =
Net present value (NPV)
- Formula ?
- What is it?
- Advantages? (4)
- Disadvantages? (2)
- the excess of the present value of the cash inflows over the present value of the outflows
- (1) it takes into account the time value of money (2) takes into account risk (3) takes into account total profitability (4) may be readily interpreted as the changes in owners’ wealth if a project is carried out
- (1) computations not simple and/or intuitie (2) does not take into account that managers may actually not follow the originally scheduled investments (or expenses)
Formula=
Annual Financial Costs (AFC)
- Formula?
- what does it measure?
- it calculates the cost of NOT taking the discount
How do you calculate the “Cost of a Loan” ?
* remember Compensating Balances are demand deposits (% of loans) that lenders may require as a condition for receiving loans.
Formula: Current Yield
Annual Interest Paid / Bond Market Price
Formula: Effective Annual Interest (EAR)
Operating Leverage
- Formula
- What does it measure?
- measures how the size of the business’s fixed costs affects its performance when revenues change.
Formula =
the Degree of Financial Leverage (DFL)
- Formula?
- What does it measure?
- measures how much a business relies on debt financing
Formula =
Cost of Debt
- What is it?
- How is it calculated?
- the after-tax cost of interest payments as measured by yields to maturity.
- It can be calculated in two ways:
(1) Yield to Maturity x ( 1 - Effective Tax Rate)
(2) (Interest Expense - Tax Deduction for interest ) / Carrying value of debt
Cost of Preferred Stock
- How is it calculated?
Dividend / Net issue price
(the stipulated dividend divided by the net issue price of the stock)
Capital Asset Pricing Model (CAPM) (Security Market Line)
Risk Free Rate + (Expected Market Rate - Risk Free Rate) x Beta
Dividend Yield Plus Growth Rate
- Formula
Cost of New Common Stock
Residual Income
The calculation of residual income is as follows: Residual income = operating income - (cost of capital x operating assets).
