Unit 3 module 5-Ratio Calculation

Question 1

5 main Ratio categories

Answer 1

1. profitability
2. liquidity
3. debt ratio
4. market ratio
5. efficiency ratio

Question 2

ratio analysis

Answer 2

ratios give us the ability to review our company’s financial performance Vs. our peers in our industry

Question 3

profitability ratio

Answer 3

measure the company’s use of the assets and expenses to generate a return that’s acceptable to its shareholders.

Question 4

liquidity ratio

Answer 4

measure how much cash is available for the company to pay its debt

calculated: current assets - current liabilities
- quick ratio
- current ratio

Question 5

current ratio

Answer 5

can the company pay its short term debs using short term assets? ranges from 1.5-3
calculated: current assets/ current liabilities

Question 6

quick ratio (acid ratio)

Answer 6

can the company pay its short term debts using short term assets excluding inventory
calculated:
current assets - inventory / current liabilities

Question 7

debt ratios

Answer 7

-measure the company’s ability to pay its long term debts

Question 8

market ratios

Answer 8

-are concerned with shareholder audiences. They measure the cost of issuing stock and the relationship between return and the value of an investment in company’s shares.

Question 9

(activity) efficiency ratio

Answer 9

-Measure how effective is the company in using its assets to generate sales/ income.

Question 10

benchmarking

Answer 10

comparing the company’s ratios to something that is meaningful. To compare its ratios to those of their industry.

Question 11

trend analysis

Answer 11

looking at how the ratios have changed over time. this helps to tell an analysis’s whether or not the company is improving its performance over time.

Question 12

profitability ratios

Answer 12

1. operating margin
2. Gross proft margin
3. Net profit margin
4. Return on total Assets
5. Return on equity

Question 13

operating margin (return on sales margin)

Answer 13

how much of a company’s sales on a % basis are generating operating profit.(does not include taxes)
- operating income / revenue
-operating margin =EBIT / revenue
EBIT= earnings before interests in taxes
-EBIT= Revenue - operating expenses

Question 14

operating income

Answer 14

revenue - operating expenses

Question 15

Gross profit margin

Answer 15

(mostly used internally) measures the amount of profit a company earns from its sales.
calculated:
-profit/sales
-Sales - COGS

Question 16

Net profit margin

Answer 16

calculated: gross profit - all expenses

Question 17

Return on total assets (ROA)

Answer 17

measures how effectively assets are being used for generating profit.
calculation: net income / total assets

Question 18

Return on Equity

Answer 18

how effective is the company in using its equity to generate profits.
-Shareholders really care about this 
calculate:
(short way) net income/ total equity
- dupont equation

Question 19

debt management ratio

Answer 19

the lower the better.
calculated:
total debt/total assetes

Question 20

Market Value ratios

Answer 20

Market price per share/ Annual earnings per share

Question 21

asset turnover

Answer 21

Asset turnover is a financial ratio that measures how efficiently a company uses its assets to generate sales revenue or sales income for the company.``

Question 22

financial leverage

Answer 22

Financial leverage refers to the amount of debt that a company utilizes to finance its operations, as compared with the amount of equity that the company utilizes.

Question 23

acceptable ROE

Answer 23

between 15-20 %

Question 24

dividends

Answer 24

Payments made by the company to its shareholders to give them a portion of the firms net income. Dividends are normally paid on a per share basis (a set amount for each share of stock that a shareholder owns)

Question 25

dividend pay out ratio

Answer 25

dividends/net income for the same period

Question 26

retention Ratio

Answer 26

the % of the net income that a firm retains in the company
calculation:
Retention ratio= 1-b (payout ratio)