Unit 2: Ratio Analysis Flashcards
Define:
Liquidity
A firm’s ability to pay its current obligations as they come due
Define:
Net Working Capital = ?
Net Working Capital =
Current Assets – Current Liabilities
Define:
Current Ratio = ?
Current Ratio =
Current Assets
————————————
Current Liabilities
*The use of LIFO lowers the current ratio
Define:
Quick (Acid Test) Ratio = ?
Quick (Acid Test Ratio) =
(Cash + Marketable Securities + Net Receivables)
——————————————————————————
Current Liabilities
Define:
Cash Ratio = ?
Cash Ratio =
(Cash + Marketable Securities)
—————————————————————
Current Liabilities
Define:
Cash Flow Ratio = ?
Cash Flow Ratio =
(Cash flow from operations)
——————————————————
Current Liabilities
Define:
Net Working Capital Ratio = ?
Net Working Capital Ratio =
(Current Assets - Current Liabilities)
—————————————————————————
Total Assets
What are ‘Activity Ratios’ used for?
To measure how quickly two noncash items are converted into cash.
Define:
A/R Turnover = ?
A/R Turnover =
(Net Credit Sales)
———————————————
Average A/R
Define:
Days’ Sales Outstanding in Receivables
Days’ Sales Oustanding in Receivables =
(Days in year)
————————————————————
A/R Turnover Ratio
Define:
Inventory Turnover = ?
Inventory Turnover =
(COGS)
———————————————————
Avg. Inventory
Define:
Days’ Sales in Inventory = ?
Days’ Sales in Inventory =
(Days in year)
————————————————————
Inventory Turnover Ratio
Define:
A/P Turnover = ?
A/P Turnover =
(Purchases)
————————————————————
Average A/P
Define:
Days’ Purchases in A/P = ?
Days’ Purchases in A/P =
(Days in year)
————————————————————
A/P Turnover Ratio
Define:
Operating Cycle = ?
Operating Cycle =
(Days’ Sales in Receivables) + (Days’ Sales in Inventory)
Define:
Cash Cycle = ?
Cash Cycle =
(Operating Cycle) - (Days’ Purchases in Payables)
Define:
F.A. Turnover Ratio = ?
F.A. Turnover =
(Net Sales)
————————————————————
Avg Net PPE
* Measures efficiency at using F.A. to generate sales
Define:
Total Assets Turnover Ratio = ?
Total Assets Turnover =
(Net Sales)
————————————————————
Avg Total Assets
* Measures efficiency at using F.A. to generate sales
For Turnover Ratios, why is a higher ratio preferable?
It implies effective use of assets to generate sales
Define:
Solvency
A firm’s ability to pay its noncurrent obligations as they come due.
Define:
Total Debt to Total Capital Ratio = ?
Total Debt to Total Capital =
(Total Debt)
———————————————————
Total Capital
Define:
Debt to Equity Ratio = ?
Debt to Equity Ratio =
(Total Debt)
————————————————
Stockholder’s Equity
Define:
Long-term Debt to Equity Ratio = ?
Long-term Debt to Equity Ratio =
(Long-term Debt)
———————————————
Stockholder’s Equity
Define:
Debt Ratio = ?
Debt Ratio =
(Total Liabilities)
———————————————
Total Assets
Define:
Times Interest Earned Ratio = ?
[Interest Coverage]
Interest Coverage =
(EBIT)
———————————————
Interest Expense
*Measures the ability to pay interest
*Denominator should include capitalized interest
Define:
Earnings to Fixed Charge Ratio = ?
[Fixed Charge Coverage]
Earnings to Fixed Charge Ratio =
(EBIT + Interest portion of operating leases)
———————————————
(Int Expense + Int portion of operating leases + dividends on preferred stock)
Define:
Cash Flow to Fixed Charges Ratio = ?
Cash Flow to Fixed Charges Ratio =
(Pre-tax operating cash flow)
———————————————
(Int Expense + Int portion of operating leases + dividends on preferred stock)
Define Operating Leverage:
Operating Leverage:
Arises from use of a high level of plant & machinery, revealed through charges for depreciation, property taxes, etc.
Define Financial Leverage:
Financial Leverage:
Arises from use of a high level of debt in financial structure, revealed through amounts paid out for interest.
Define:
Degree of Leverage = ?
Degree of Leverage =
(Pre-fixed cost income amount)
———————————————
Post-fixed cost income amount
Define Leverage
- The relative amount of fixed costs in the overall cost structure
- Creates risk because fixed costs must be covered
Degree of Operating Leverage = ?
[Single period version]
Degree of Operating Leverage =
(Contribution Margin)
———————————————
Operating Income or EBIT
Degree of Operating Leverage = ?
[Percentage-change version]
Degree of Operating Leverage =
(% change in operating income or EBIT)
———————————————
% change in sales
*A firm with high operating leverage necessarily carries a greater degree of risk because fixed costs must be covered regardless of the level of sales
*Such a firm is also able to expand production rapidly in times of higher product demand
*The more leveraged a firm is in its operations, the more sensitive operating income is to changes in sales volume
Degree of Financial Leverage = ?
[Single period version]
Degree of Financial Leverage =
(EBIT)
———————————————
EBT
Degree of Financial Leverage = ?
[Percentage-change version]
Degree of Financial Leverage =
(% change in net income)
———————————————
% change in EBIT
*High Degree of financial leverage = greater risk, more residual profit for shareholders after debt service (interest on debt is tax deductible)
