Week 3 - Financial Ratios

Question 1

What is Net Profit Margin used for?

Answer 1

Most widely used metric of profitability. Often just called profit margin.

Question 2

Formula for Return on Equity (ROE)

Answer 2

Net Income / Total Equity

Question 3

Formula for Equity Multiplier

Answer 3

Total Assets / Total Stockholder Equity

Question 4

When is Quick Ratio better than Current Ratio?

Answer 4

For companies w/ large inventories (Walmart)

Question 5

Name 4 Liquidity Ratios

Answer 5

1. Current Ratio
2. Quick Ratio
3. Cash Ratio
4. Operating Cash Flow

Question 6

Formula for P/E Ratio

Answer 6

Stock Price / Earnings Per Share

Question 7

Formula for Gross Profit Margin

Answer 7

[Gross Profit / Total Revenue] = [Total Revenue - Cost of Goods Sold] / Total Revenue

Question 8

Name 5 Profitability Ratios

Answer 8

1. Gross Profit Margin 2. Net Profit Margin 3. Return on Assets (ROA) 4. Return on Equity (ROE) 5. The DuPont Identity

Question 9

What is the Equity Multiplier used for?

Answer 9

Measure of how much financial leverage through equity the company is using

Question 10

Name one disadvantage of Current Ratio

Answer 10

For companies with large inventories, it is hard to see available cash. Use Quick Ratio instead

Question 11

Formula for Cash Ratio

Answer 11

Cash & Equiv / Current Liabilities

Question 12

Formula for The DuPont Identity

Answer 12

ROE = ROA x Equity Multiplier = Net Profit Margin x Total Asset Turnover x Equity Multiplier

Question 13

Formula for Total Asset Turnover

Answer 13

Total Revenue / Total Assets

Question 14

Name 3 Asset Turnover Ratios

Answer 14

1. Inventory Turnover 2. Days Sales in Inventory 3. Total Asset Turnover

Question 15

Name 2 Market Value Ratios

Answer 15

1. P/E Ratio 2. Market Capitalization

Question 16

Formula for Interest Coverage Ratio

Answer 16

EBIT / Interest Expenses

Question 17

Formula for Inventory Turnover

Answer 17

Cost of Goods Sold / Inventory

Question 18

What is the Return on Equity (ROE) for?

Answer 18

Used to determine how well management is achieving shareholder value

Question 19

Formula for Return on Assets (ROA)

Answer 19

[Net Income / Total Assets]

Question 20

Formula for Market Capitalization

Answer 20

Stock Price x Outstanding Shares

Question 21

When ratios involve both Income & Balance values, what should you consider?

Answer 21

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.

Question 22

Formula for Days Sales in Inventory

Answer 22

365 / Inventory

Question 23

What is the Interest Coverage Ratio used for?

Answer 23

How easily a company can pay interest expense by its earnings

Question 24

Formula for Operating Cash Flow

Answer 24

Cash Flow from Operations / Current Liabilities

Question 25

Formula for Current Ratio

Answer 25

Current Assets / Current Liabilities

Question 26

Formula for Net Profit Margin

Answer 26

[Net Income / Total Revenue]

Question 27

Quick Ratio is the same as Current Ratio w/o what ?

Answer 27

Inventory and Prepaid debt (which aren’t very liquid)

Question 28

Formula for Total Debt Ratio

Answer 28

Debt / Assets = [[ Total Assets - Total Stock Equity] / Total Assets ]

Question 29

When is Cash Ratio used?

Answer 29

For companies under distress, since it reflects immediately available cash

Question 30

Formula for Quick Ratio

Answer 30

[Cash + Marketable Securities + Accounts Receivable] / Current Liabilities

Question 31

Name 3 Solvency/Leverage Ratios

Answer 31

1. Total Debt Ratio 2. Equity Multiplier 3. Interest Coverage Ratio

Question 32

Common Size Balance Sheets are based on?

Answer 32

Percentage of Total Assets

Question 33

Common size Income Sheets are based on?

Answer 33

Percentage of Total Revenue