Week 3 - Financial Ratios Flashcards
What is Net Profit Margin used for?
Most widely used metric of profitability. Often just called profit margin.
Formula for Return on Equity (ROE)
Net Income / Total Equity
Formula for Equity Multiplier
Total Assets / Total Stockholder Equity
When is Quick Ratio better than Current Ratio?
For companies w/ large inventories (Walmart)
Name 4 Liquidity Ratios
- Current Ratio
- Quick Ratio
- Cash Ratio
- Operating Cash Flow
Formula for P/E Ratio
Stock Price / Earnings Per Share
Formula for Gross Profit Margin
[Gross Profit / Total Revenue] = [Total Revenue - Cost of Goods Sold] / Total Revenue
Name 5 Profitability Ratios
- Gross Profit Margin 2. Net Profit Margin 3. Return on Assets (ROA) 4. Return on Equity (ROE) 5. The DuPont Identity
What is the Equity Multiplier used for?
Measure of how much financial leverage through equity the company is using
Name one disadvantage of Current Ratio
For companies with large inventories, it is hard to see available cash. Use Quick Ratio instead
Formula for Cash Ratio
Cash & Equiv / Current Liabilities
Formula for The DuPont Identity
ROE = ROA x Equity Multiplier = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Formula for Total Asset Turnover
Total Revenue / Total Assets
Name 3 Asset Turnover Ratios
- Inventory Turnover 2. Days Sales in Inventory 3. Total Asset Turnover
Name 2 Market Value Ratios
- P/E Ratio 2. Market Capitalization
Formula for Interest Coverage Ratio
EBIT / Interest Expenses
Formula for Inventory Turnover
Cost of Goods Sold / Inventory
What is the Return on Equity (ROE) for?
Used to determine how well management is achieving shareholder value
Formula for Return on Assets (ROA)
[Net Income / Total Assets]
Formula for Market Capitalization
Stock Price x Outstanding Shares
When ratios involve both Income & Balance values, what should you consider?
Income values are over the course of a year, while Balance values are at a point in time. You must consider whether to use the average, beginning or final value. Choose the industry standard.
Example: Inventory Turnover (Cost of Goods sold is on Income sheet, while Inventory is on balance sheet); Retail uses average inventory over the year.
Formula for Days Sales in Inventory
365 / Inventory
What is the Interest Coverage Ratio used for?
How easily a company can pay interest expense by its earnings
Formula for Operating Cash Flow
Cash Flow from Operations / Current Liabilities
Formula for Current Ratio
Current Assets / Current Liabilities
Formula for Net Profit Margin
[Net Income / Total Revenue]
Quick Ratio is the same as Current Ratio w/o what ?
Inventory and Prepaid debt (which aren’t very liquid)
Formula for Total Debt Ratio
Debt / Assets = [[ Total Assets - Total Stock Equity] / Total Assets ]
When is Cash Ratio used?
For companies under distress, since it reflects immediately available cash
Formula for Quick Ratio
[Cash + Marketable Securities + Accounts Receivable] / Current Liabilities
Name 3 Solvency/Leverage Ratios
- Total Debt Ratio 2. Equity Multiplier 3. Interest Coverage Ratio
Common Size Balance Sheets are based on?
Percentage of Total Assets
Common size Income Sheets are based on?
Percentage of Total Revenue
