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Finance D 76 > Unit 4 Ratios > Flashcards

Unit 4 Ratios Flashcards

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1
Q

why are ratios useful

A

help standardize info from financial statements for comparison

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2
Q

describe flexibility of ratios

A

any numbers of ratios can be used, modified or created for a unique situation

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3
Q

describe how ratios allow focus

A

help spot trends and point in a direction to investigate

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4
Q

describe how ratios allow evaluation

A

evaluate if a firm is reaching its stated goals

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5
Q

benchmarking

A

process of doing a financial analysis on a firm and comparing it to other similar firms

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6
Q

Types of comparison methods

A

Trend analysis
Cross-Sectional analysis
Progress Measurement

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7
Q

Describe Trend Analysis

A

look at a firms ratios over time

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8
Q

Describe Cross-Sectional Analysis

A

compare ratios between firm and peer group

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9
Q

Describe Progress Measurement

A

compare ratios to goals

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10
Q

2 pitfalls to ratios

A

Timing issues

Accounting issues

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11
Q

2 types of timing issues with pitfalls

A

Seasonal firms - different growth rates in different seasons
High-growth firms - balance sheets are from one point in time, income statements are an average over 1 year. Growth was much slower at start of year, creating timing issue. Can mitigate by using average of 2 balance sheets.

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12
Q

Describe accounting issues with ratios

A

firms can have different accounting policies and may appear different, even though they are economically identical ie each may use different inventory systems

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13
Q

5 types of ratios

A 
Liquidity
Activity (efficiency)
Leverage (financing, solvency)
Profitability
Market
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14
Q

Describe liquidity ratios

A

measure ability to meet short term obligations

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15
Q

Describe Activity ratios

A

aka efficiency ratios

measure how well a firm uses assets to generate cash

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16
Q

Describe Leverage ratios

A

aka financing/solvency ratios
measure how a firm in financed
proportions of equity and debt to finance assets

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17
Q

Describe Profitability ratios

A

directly judge how profitable a company is compared to past or to competitors

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18
Q

Describe Market ratios

A

evaluate if stock is overvalued or undervalued

19
Q

Current Ratio

A

Liquidity Ratio
CA/CL
use current assets to pay current liabilities
higher CR means better ability to pa short term obligations

20
Q

Quick Ratio

A

Liquidity Ratio (acid test ratio)
CA-I/CL
remove inventory from Current Ratio
use immediate assets to pay liabilities

21
Q

Accounts Receivable Turnover

A

Activity Ratio
CSAR
ability to collect credit payments, times per year
evaluate with trend analysis

22
Q

Average Collection Period

A

Activity Ratio
365/ART
days to collect all credit payments
indicates tightness of credit standards

23
Q

Inventory Turnover

A

Activity Ratio
COGS/I
measure if sufficient inventory is on hand
evaluate with cross sectional analysis

24
Q

Total Asset Turnover

A 
Activity Ratio
SA
asset use efficiency
higher TAT means firm is generating more sales per asset $
trend and xsec
25
Q

Fixed Asset Turnover

A

Activity Ratio
SFA
remove current assets from TAT, which are influenced by risk preferences
exclude risk preference from asset use efficiency

26
Q

Operating Income Return on Investment

A

Activity Ratio (Profitability)
OIA
measure profit as pct of assets
Looks only at operations to evaluate asset use efficiency
How much pre tax, pre financing $ generated per asset $

27
Q

Debt Ratio

A

Leverage Ratio
TL/TA
proportion of assets financed with debt
aggressiveness in leveraging debt

28
Q

Debt to Equity Ratio

A

Leverage Ratio
LE
ability to use equity to pay debt

29
Q

Times Interest Earned

A

Leverage Ratio
EBIT/I
ability to pay interest with earnings

30
Q

Return on Assets

A 
Profitability Ratio
NIA
proportion of earnings related to assets
higher ROA is better
use in xsec analysis
31
Q

Return on Equity

A

Profitability Ratio
NIE
ROE>ROA means better use of debt

32
Q

Gross Margin

A 
Profitability Ratio
PS
percentage of gross profit from sales
shows how much waste is minimized in production process
use in cross sectional analysis
33
Q

Operating Margin

A

Profitability Ratio
EBIT/S
pretax -compare firms with different capital structures

34
Q

Net Profit Margin

A 
Profitability Ratio
NIS
measures profit as a pct of sales
positive means value created
used in trend and xsec
35
Q

Market to Book Ratio

A

Market Ratio
MVEBVE
>1 growth, <1 value

36
Q

Price to Earnings Ratio

A

Market Ratio
PPSEPS
predict value of stock, firm

37
Q

COGS

A

Cost of Goods Sold

38
Q

EBIT

A

Earnings before Interest and Tax

39
Q

Dupont framework formula

A

ROE = Net Profit Margin x Total Asset Turnover x Leverage Multiplier

40
Q

summary of Dupont framework formula

A

ROE = NPM x TAT x Leverage Multiplier

41
Q

Dupont alternate formula

A

ROE = ROA x Leverage Multiplier

42
Q

Meaning of dupont framework

A

ROE is a function of Operating efficiency, Asset efficiency and financing policy

43
Q

Meaning of alternate dupont framework formula

A

Return on all investors is measured by profitability and asset use efficiency
The effect of capital structure appears only in ROE

Finance D 76 (5 decks)

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