Week 6: Ratios and etc. Flashcards
Why are ratios important?
Comparisons are easier
When comparing company’s ratios, the firms should be:
The same size and in the same accounting system (IFRS or USG)
Gross profit margin
(Revenue - COGS) / Revenue
Debt to Equity Ratio
= Total liabilities / shareholder equity
Price to earning ratio
share price / earnings per share
Return On Assets ratio
= Net Income / Total Assets
Debt Ratio
Total Liabilities / Total Assets
Inventory Turnover
Cost of Goods sold / average inventory
Working Capital
Current assets - Current liabilities
Day’s sales in inventory
Average inventory / (COGS / 365)
Gross Profit Ratio*
Gross profit / Net Sales *100
Working Capital Ratio
Current Assets / Current Liabilities
ROA
Net Income / Total Assets
Non-financials examples
Airlines: Capacity
Hotels: Occupancy
Gross profit
Revenue - COGS
Dividend Ratio
Dividends / Net Income
Types of Ratios
Profitability, liquidity, and debt ratios
P/E ratio
Price per share / Earnings per share
What is a high leverage ratio?
a 3/1 D/E ratio is very high
Provisions
Will happen and you will know the amount
Bad debt or warrenties
Contingent liability
You are not sure if it is going to happen or how much
Lease
Temporary rights to PPE
All deferred taxes are long term
Development in IFRS lasts:
20 years
Amortized over 20 years
Component depreciation
Used in IFRS not USG
Depreciating the individual parts of PPE.
The engine may be depreciated over 15 years while the chassis may only be 5
Impairment in the different accounting systems
USG: Only lets you go down
IFRS: Impairment can be reversed (The value of an asset can go down and then back up)
Leases in the different accounting system
IFRS: “no bright lines”
Purpose of working capital ratio
Tells you how liquid a firm is
Purpose of D/E ratio
Tells you how leveraged a firm is
A/R turnover in days
Accounts receivable / (Revenue/365)
Kevin Enters into a contract on 10/1/19 with AT&T for 2 years for 2400 and he receives a free Apple phone. The fair value of the same Apple phone in an Apple store is $600. How and when would AT&T recognize revenue
10/1/19
Dr. Cash 2400
Cr. Def Rev 1800
Cr. Rev 600
Every month
Dr. Def Rev 75
Cr. Rev 75
