Test 1 Flashcards

0
Q

What are some other words for the term “profit”

A

Income and earnings

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1
Q

How do you calculate after tax operating income?

A

EBIT (1-tax rate)

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2
Q

How do you calculate Return on Assets (ROA)?

A

Net income/total assets

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3
Q

How do you calculate Return on Equity (ROE)?

A

Net income/shareholder’s equity

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4
Q

How do you calculate net profit margin (NPM)?

A

Net income/sales

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5
Q

How do you calculate operating profit margin (OPM)?

A

EBIT/sales

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6
Q

How do you calculate total assets turnover (TAT)?

A

Sales/total assets

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7
Q

How do you calculate days sales outstanding (DSO)?

A

Receivables / (sales/365)

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8
Q

How do you calculate inventory turnover (IT)?

A

Sales/inventories

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9
Q

How do you calculate fixed asset turnover (FAT)?

A

Sales/fixed assets

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10
Q

What does ROE show?

A

How much profit is generated for every dollar of equity on the balance sheet

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11
Q

What does ROA show?

A

How much profit generated for every dollar of assets

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12
Q

What does NPM show?

A

How many cents of profit generated one every dollar of sales

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13
Q

What does TAT show?

A

How efficiently assets are being used (higher number = more efficient)

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14
Q

Is it good for the TD/TA ratio to be high or low?

A

Low

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15
Q

What is TIE and is it better for it to be high or low?

A

TIE means “times earned interest” and it is how many times a company is able to make their interest payment. High is good.

16
Q

What is DSO and is it better for it to be high or low?

A

DSO is “days sales outstanding” and it means how many days it takes for a business to collect it’s receivables. It is good for this number to be low.

17
Q

What is IT and is it good for this to be high or low?

A

IT is inventory turnover and this is how many times a year that the business turns over it’s inventory. It is good for this to be high (shows they are circulating inventory frequently)

18
Q

What does the P/E ratio show?

A

This shows how much investors are willing to pay for every dollar of earnings, the investors expectations for growth

19
Q

What is the historical avg for P/E?

A

Between 14-17x

20
Q

What does the price per share/book value per share show?

A

It shows if investors are willing to pay more than the price of the book value.

21
Q

How do you calculate the difference in company and industry to determine if the difference is large enough to be significant?

A

(Industry - company) / industry

22
Q

What are some cautions when looking at ratios?

A
  1. Seasonal factors
  2. Multi divisional companies can have different ratios, especially when products are different
  3. Window dressing: making statements look better than they are