SU7: Ratio Analysis Flashcards
Net Working Capital
Current Assets - Current Liabilities
Current Ratio
Current Assets / Current Liabilities
Quick (Acid Test) Ratio
(Cash + Marketable Securities + Net Receivables) / Current Liabilities
Cash Ratio
(Cash + Marketable Securities) / Current Liabilities
Cash Flow Ratio
Cash flow from operations / Current Liabilities
Net Working Capital Ratio
(Current Assets - Current Liabilities) / Total Assets
Gross Profit Margin
(Net Sales - COGS) / Net Sales
Operating Profit Margin
Operating Income / Net Sales
Net Profit Margin Ratio
Net Income / Net Sales
EBITDA Margin
EBITDA / Average Total Assets
Return on Assets (ROA)
Net Income / Average Total Assets
Return on Equity (ROE)
Net Income / Average Total Equity
Relationship between ROA and ROE
ROA = ROE x (1 - Debt Ratio)
Dupont Model Equity- components
Net Profit Margin x Assets Turnover x Equity Multiplier
Assets Turnover
Net Sales / Average Total Assets
Equity Multiplier
Average Total Assets / Average Total Equity
Dupont Model Assets
ROA = Net Proft Margin x Total Asset Turnover
A change in accounting principle occurs when an entity
(1) adopts a generally accepted principle different from the one previously used, (2) changes the method of applying a generally accepted principle, or (3) changes to a generally accepted principle when the principle previously used is no longer generally accepted
A change in accounting estimate is applied retrospectively or prospectively?
Prospectively only
A change in accounting principal is applied retrospectively or prospectively?
Retrospectively if practicable.
An error correction is applied retrospectively or prospectively?
Retrospectively - restating prior periods
Total Debt to Total Capital Ratio
Total Debt / Total Capital
Debt to Equity Ratio
Total Debt / Stockholders Equity
Long Term Debt to Equity Ratio
Long Term Debt / Stockholders Equity
Debt to Total Assets Ratio
Total Liabilities / Total Assets
Times Interest Earned Ratio
EBIT / Interest Expense
Earnings to Fixed Charges Ratio
Earnings before fixed charges and taxes / fixed charges
Cash Flow to Fixed Charges Ratio
(Cash From Operations + Fixed Charges + Tax Payments) / Fixed Charges
note that cash from operations is after tax
Operating Leverage
use of a high level of plant and machinery in the production process, revealed through charges for depreciation, property taxes, etc.
Financial leverage
use of a high level of debt in the firm’s financing structure, revealed through amounts paid out for interest.
Degree of Leverage
Pre-fixed-cost income amount / Post-fixed-cost income amount
EBIT / Earnings before Tax (tax not included anywhere)
DOL - single period version
Contribution Margin / Operating income or EBIT
DOL - percentage change version
Percent Change in operating income or EBIT / Percent Change in Sales
DFL - single period version
Earnings before interest and taxes (EBIT) / earnings before taxes
DFL - percentage change version
Percent Change in Net Income / Percent Change in EBIT
List forms of off-balance sheet financing.
Investment in unconsolidated (less than 50% int) entities
Joint Ventures
Special Purpose Entity (although, VIEs must be consolidated)
Factoring accounts receivables with recourse
How should a change in an assets useful life be reflected?
Current and prospective years only
Are deferred taxes included as current liability?
No!
A change in the estimate for bad debts should be
Treated as affecting only the period of the change and then all future periods.
Prepaids are/are not included in Acid Test?
are NOT
Sustainable Growth Rate
ROE x (1 - Dividend Payout Ratio)
For a given level of sales and holding all other financial statement items constant, a company’s return on equity (ROE) will <> as total assets <>
Decrease as total assets increase
All else being equal, a company with a higher dividend-payout ratio will have a <> debt-to-assets ratio and a <> current ratio.
Higher, Lower
In comparing the current ratios of two companies, why is it invalid to assume that the company with the higher current ratio is the better company?
A high current ratio may indicate inefficient use of various assets and liabilities
Where to classify “reserve for bond retirement”
Equity section
