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19 Cards in this Set
- Front
- Back
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Types of ratios and their definitions:
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Liquidity ratio - short-term ability of company to pay its obligations and meet unexpected needs for cash.
Profitability ratio - Measures income or the operating successes of a company for a given period of time. Solvency ratio - measures ability of a company to survive over a long period of time |
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Liquidity Ratios (8 of them):
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Working capital; current ratio; acid-test ratio (quick ratio); current cash debt coverage ratio, accounts receivable turnover ratio; average collection period; inventory turnover ratio; number of days sales in inventory
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Working Capital - Computed to evaluate the company's ability to pay its current assets
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Working Capital = Total Current Assets - Total Current liabilities
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Current Ratio - measures company's ability to pay its current liabilities with its current assets
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Current Ratio = Total Current Assets/Current Liabilities
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Acid-test Ratio (Quick Ratio) - conservative estimate of a company's liquidity by using only cash, short term investments, and receivables
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Acid Test = (Cash + Short-term investments + receivables)/Total Current Liabilities
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Current cash debt cover ratio - measures company's liquidity using net cash flows from operating activities instead of current assets
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Current cash debt = Net cash flows from operating activities/average total current liabilities
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Accounts receivable turnover ratio - measures number of times a company is able to collect its receivables during a period
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Acc. Rec. turnover = Net sales revenue/average accounts receivable
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Average collection period - measures average number of days between selling goods and collecting cash from sales
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Av. collection period = 365/accounts receivable turnover ratio
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inventory turnover ratio - measures number of times inventory is sold during a period
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Inventory turnover ratio = COGS/Average inventory
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Number of days' sales in inventory - measures number of days, average, between purchasing inventory and selling it
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Number of days' sales = 365/inventory turnover ratio
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Profitability ratios (6 of them):
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Gross (margin/profit) rate; profit margin ratio; return on assets; return on equity; earnings per share; Price-earnings ratio
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Gross (margin/profit) rate - measures percentage of selling price of inventory that goes to profit
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Gross margin rate = net income/net sales revenue
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Profit margin ratio - measures percentage of each dollar that results in net income
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Profit margin ratio = net income/average total assets
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Return on equity - measures how many dollars of net income the company earned for each dollar invested
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ROE = net income/average total equity
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Earnings per share - Measures amount of net income associated with each share of common stock.
Only ratio required to be on financial statements!! |
EPS = Net income/number of common shares outstanding
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Price-earnings ratio - P/E measures investors' expectations regarding growth potential and stabilitiy
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P/E = market price per share/earnings per share
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Solvency Ratios (2 of them):
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Debt-to-Equity; Times interest earned ratio
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Debt-to-equity - percentage of funds being provided by creditors vs stockholders. Higher ratio means higher risk to creditors.
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D-T-E = Total Liabilities/total equity
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Time interest earned ratio - measures company's ability to meet its interest payments as they're due.
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Times interest earned ratio = (net income + income tax expense + interest expense)/interest expense
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