session 19 - financial statement analysis Flashcards
What is the formula for Return on Equity?
Return on Equity = Net Income / Average Stockholders’ Equity
What is the interpretation of Return on Equity?
The measure indicates how much income was earned for every dollar invested by the owners.
What is the formula for Return on Assets?
Return on Assets = Net Income / Average Total Assets
What is the interpretation of Return on Assets?
The ratio measures how well assets have been employed by the business.
What is the formula for Net Profit Margin?
Net Profit Margin = Net Income / Net Sales Revenue
What is the interpretation of Net Profit Margin?
The ratio tells the percentage of each sales dollar, on average, that represents income.
This value is affected by level of gross profit, expenses, and competition and the company’s willingness and ability to control costs.
What is the formula for Earnings Quality?
Earnings Quality = Cash Flows from Operating Activities / Net Income
What is the interpretation of Earnings Quality? What does a ratio higher than 1 mean?
A ratio higher than 1 indicates high-quality earnings.
What is the formula for Total Asset Turnover?
Total Asset Turnover = Net Sales Revenue / Average Total Assets
What is the interpretation of Total Asset Turnover?
The ratio captures how well a company uses its assets to generate revenue. It measures the productivity of a company’s assets. A higher asset turnover is preferable.
What is the formula for the Debt-to-Equity Ratio?
Debt-to-Equity Ratio = Total Liabilities / Stockholders’ Equity
What is the interpretation of the Debt-to-Equity Ratio?
The ratio measures the amount of liabilities that exists for each dollar invested by the owners - how reliant the company is on debt financing relative to equity financing. Also measures the company’s ability to meet its debt obligations. Higher means risky!
