Finance final Flashcards
(31 cards)
Current ratio
CA/CL
It measures your business’s ability to meet its short-term liabilities when they come due.
Quick ratio
(CA-Inv)/CL
quick ratio, also known as the acid-test ratio, is a liquidity ratio that measures the ability of a company to use near-cash assets to extinguish or retire current liabilities immediately. It is the ratio between quick assets and current liabilities.
Inventory turnover
COGS/Inventory
How many times during the year the inventory is “turned over”
High number → more efficiency
Low number → technological obsolescence or change of fashion
ACP
AccRec/Average Sales per day
APP
AccPay/Average Purchases per day
Asset Turnover
Sales/Total Assets
How effectively assets are used to generate sales
Generally, the higher the better.
Lower ratio – inefficiency or capital intensity
Debt ratio
TL/TA
A company’s debt ratio can be calculated by dividing total debt by total assets.
A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of less than 100% indicates that a company has more assets than debt.
Times Interest Earned
EBIT/Interest
solvency metric that evaluates whether a company is earning enough money to pay its debt.
GPM
Gross Profits/ Sales
the percentage of sales income you have left after paying for the stuff you sold. A lot of your sales income will go straight back out the door to pay for the goods or services you provide. Gross profit margin is the portion left over.
OPM
Operating profits/Sales
measures how much profit a company makes on a dollar of sales after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax.
NPM
Earnings for common shareholders/Sales
financial ratio that is widely used to measure the success of a company. It is an essential metric for investors, shareholders, and businesses to determine the amount of profit a company generates from its revenue.
ROA
Earnings fo CS/TA
financial ratio that indicates how profitable a company is relative to its total assets. Corporate management, analysts, and investors can use the return on assets ratio to determine how efficiently a company uses its resources to generate a profit.
ROE
Earnings for CS/SE
Return on equity is a financial ratio that shows how well a company is managing the capital that shareholders have invested in it. To calculate ROE, one would divide net income by shareholder equity.
EPS
Earnings for CS/Common shares outstanding
a measure of a company’s profitability, calculated by dividing quarterly or annual income (minus dividends) by the number of outstanding stock shares. The higher a company’s EPS, the greater the profit and value perceived by investors.
P/E - price to earnings
Price/EPS
share price / earnings per share
reveals if a stock is overvalued or undervalued relative to its earnings. Earnings per share (EPS) reveals how much profit each outstanding share of stock has earned.
M/B
Price/BV per share
The market to book ratio is calculated by dividing the current closing price of the stock by the most current quarter’s book value per share.
BV per share
Common equity / number of shares outsanding
This figure is important because it translates a company’s overall performance into per-share metrics, making an analysis much easier regarding a stock’s market price at a given time.
3 major methods to conduct financial analysis:
Horizontal (aka trend)
Vertical (aka common-size)
Ratio
Horizontal/Trend Analysis
The easiest method intended to capture change from one period to another
Growth rate:(Vnew-Vold)/Vold x 100%
Vertical/Common-size Analysis
How? Set Total Assets = 100% on a Balance Sheet or Sales = 100% on the Income Statement (Some also do CFO = 100% on the CF).
Then take the values you are interested in (or all ) and calculate them as percentage.
Ratio Analysis notes
You can see same ratio calculated differently in various sources. This is normal.
There is no right/wrong/ideal ratio!
It is very important to choose the right benchmark for comparison
Different accounting methods distort ratio analysis
High inflation distorts ratio analysis
Ratios – Main Uses: Activity
Activity – managers
How efficiently company performs its tasks?
Ratios – Main Uses: Profitability
Profitability – managers + investors
How profitable is the company?
Ratios – Main Uses: Liquidity
Liquidity – creditors
Can company pay the creditors in the short-run?
