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strat 5700 > ch 1 ratios > Flashcards

ch 1 ratios Flashcards

1
Q

Define strategy

A

a firms’s theory about how to gain a competitive advantage

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2
Q

Why do we study strategy?

A

to gain a competitive advantage over the competitor

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3
Q

How do we measure competitive advantage?

A

Accounting info and economic information

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4
Q

what are the profitability ratios?

A

ROA, ROE, Gross profit margin, earnings per share, price earnings ratio, cash flow per share

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5
Q

What are the liquidity Ratios?

A

Current ratio and Quick Ratio

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6
Q

What are the leverage ratios?

A

debt to assets, debt to equity, times interest earned

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7
Q

What are the activity ratios

A

Inventory turnover, accounts receivable turnover, average collection period

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8
Q

What do the profitability ratios measure?

A

some measure of profit in the numerator and some measure of firm size or assets in the denominator

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9
Q

what do Liquidity ratios measure?

A

Ratios that focus on the ability of a firm to meet its short term financial obligations

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10
Q

What do leverage ratios measure?

A

ratios that focus on the level of a firm’s financial flexibility, including its ability to obtain more debt

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11
Q

What do activity ratios measure?

A

ratios that focus on the level of activity in a firm’s business

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12
Q

ROA

A

Profit after taxes/total assets

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13
Q

ROE

A

Profit after taxes/total stockholder’s equity

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14
Q

Gross profit margin

A

(sales - cofgs)/sales

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15
Q

Earnings per share (EPS)

A

(profits after tax - preferred stock dividends / number of shares of common stock outstanding

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16
Q

define Earnings per share (eps)

A

a measure of profit available to owners of common stock. Larger is usually better

17
Q

price earnings ratio

A

(current market price/share)/(after-tax earnings/share)

18
Q

Cash flow per share

A

(after-tax profit + depreciation)/number of common shares stock outstanding

19
Q

define ROA

A

A measure of return on total investment in a firm. Larger is usually better.

20
Q

define ROE

A

A measure of return on total equity investment in a firm. Larger is usually better.

21
Q

define gross profit margin

A

A measure of sales available to cover operating expenses and still generate a profit. Larger is usually better

22
Q

define price earnings ratio (p/e)

A

A measure of anticipated firm performance–a high p/e ratio tends to indicate that the stock market anticipates strong future performance. Larger is usually better

23
Q

define cash flow per share

A

A measure of funds available to fund activities above current level of costs. Larger is usually better

24
Q

current ratio

A

type of ratio: Liquidity ratio

equation: current assets/current liabilities
definition: A measure of the ability of a firm to cover its current liabilities with assets that can be converted into cash in the short term. Recommended in the range of 2 to 3

25
Q

Quick ratio

A

type: Liquidity Ratio
equation: (current assets - inventory)/current liabilities
Definition: A measure of the ability of a firm to meet its short-term obligations without selling off its current inventory. a ratio of 1 is though to be acceptable in many industries

26
Q

debt to assets

A

type: Leverage Ratios
equation: total debt/total assets
definition: A measure of the extent to which debt has financed a firm’s business activities. The higher, the greater the risk of bankruptcy.

27
Q

debt to equity

A

type: leverage Ratio
equation: total debt/total equity
definition: A measure of the use of debt versus equity to finance a firm’s business activities. Generally recommended less than 1

28
Q

Times interest earned

A

type: Leverage ratio
equation: profit before interest and teas/ total interest charges
definition: A measure of how much a firm’s profits can decline and still meet its interest obligations. should be well above 1.

29
Q

Inventory turnover

A

type: activity ratio
equation: annual credit sales
definition: A measure of the speed with which a firm’s inventory is turning over

30
Q

Accounts receivable turnover

A

type: activity ratio
equation: annual credit sales/accounts receivable
define: a measure of the average time it takes a firm to collect on credit sales

31
Q

Average collection period

A

type: activity ratio
equation: accounts receivable/average daily sales
definition: A me sure of the time it takes a firm to receive payment after a sale has been made

32
Q

a limitation of accounting measures

A

Accounting measures of competitive advantage do no include the cost of capital

33
Q

Cost of capital

A

the rate of return that a firm promises to pay its suppliers of capital

34
Q

two sources of capital

A

debt (capital from banks and bondholders) and equity (capital from individuals and institutions that purchase a firm’s stock)

35
Q

cost of debt

A

the interest that a firm must pay its debt holders

36
Q

cost of equity

A

the rate of return a firm must promise its equity holders

strat 5700 (2 decks)

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