Financial Ratios

Question 1

Net working capital

Answer 1

Current Assets - Current Liabilities

Question 2

EBIT

Answer 2

Total Revenues - costs - depreciation

Question 3

Market Capitalization or Market Value

Answer 3

Shares outstanding * stock price

Question 4

Book Value

Answer 4

Total shareholders’ equity (balance sheet)

Question 5

Market Value-Added

Answer 5

Market value - book value

Shares Outstanding * Stock Price - Total Shareholders’ Equity

Question 6

Price-to-Book Ratio

Answer 6

Market Value / Book Value

Question 7

Economic Value Added (EVA)

Two Ways

Answer 7

1. (Aftertax Interest + Net Income) - (Cost of Capital * Capital)
2. (((Aftertax interest + net income) / Total Capital) - Cost of Capital) * Total Capital

Question 8

Total Capital

Answer 8

Long-term debt + Total Shareholders’ equity

Question 9

Return on capital (ROC)

Answer 9

(After-tax interest + net income) / Total Capital

Question 10

Return on equity (ROE)

(Simple)

Answer 10

Net Income / Total Shareholders’ Equity

Question 11

Return on Assets (ROA)

Answer 11

(Aftertax interest + net income) / Total Assets

Question 12

Asset turnover ratio

Answer 12

Sales / Total assets at start of year

or

Sales / average assets

Sales (income statement)
Total assets (balance sheet)

Question 13

Inventory turnover ratio

Answer 13

COGS / Inventory at Start of Year

COGS (income statement)
Total assets (balance sheet)

Question 14

Average days in inventory

Answer 14

Inventory at Start of Year / (COGS * 365)

Inventory (balance sheet)
COGS (income statement)

Question 15

Receivables Turnover

Answer 15

Sales / Receivables at Start of Year

Sales (income statement)
Receivables (balance sheet)

Question 16

Average collection period

Answer 16

Receivables at start of year / (Sales / 365)

Receivables (balance sheet)
Sales (income statement)

Question 17

Profit Margin

Answer 17

Net Income / Sales

Net Income (income statement)
Sales (income statement)

Question 18

Operating profit margin

Answer 18

(Aftertax Interest + Net Income) / Sales

Aftertax interest (income statement)
Net Income (income statement)
Sales (income statement)

Question 19

Return on Assets

Two Ways

Answer 19

(Net Income + Interest) / Assets

or

(Sales / Assets) * [(Net Income + Interest)/Sales]

= Asset Turnover * Operating Profit Margin

Question 20

Long-term debt ratio

Answer 20

Long-term debt / (Long-term debt + Equity)

Question 21

Debt-equity ratio

Answer 21

Long-term debt / Equity

Question 22

Total debt ratio

Answer 22

Total liabilities / Total assets

Question 23

Leverage ratio

Answer 23

Debt / EBITDA

Question 24

Times interest earned

Answer 24

EBIT / Interest Payments

Question 25

Cash coverage ratio

Answer 25

(EBIT + D&A) / Interest Payments

Question 26

Return on equity (ROE)

Complex

Answer 26

Leverage Ratio * Asset Turnover * Operating Profit Margin * Debt Burden

= (Assets / Equity) * (Sales / Assets) * ((Net Income + Interest) / Sales) * (Net Income / (Net Income + Interest))

Question 27

When is RoE = RoA?

Answer 27

When there is no debt

Question 28

When is RoE > RoA?

Answer 28

When RoE > the interest rate

Question 29

Net working capital to total assets ratio

Answer 29

Net Working Capital / Total Assets

(Current Assets - Current Liabilities) / Total Assets

Question 30

Current Ratio

Answer 30

Current Assets / Current Liabilities

Question 31

Quick Ratio

Answer 31

(Cash + Marketable Securities + Receivables) / Current Liabilities

Question 32

Cash Ratio

Answer 32

(Cash + Marketable Securities) / Current Liabilities

Question 33

Interval Measure

Answer 33

(Cash + Marketable Securities + Receivables) / (Average Daily Expenditures from Operations)