Financial Ratios Flashcards
(12 cards)
Liquidity: Current Ratio
Current Assets / Current Liabilities
-Tells you how well a company can pay off its short-term liabilities with short-term assets
-Ratio < 1: Company may struggle to pay short-term debts
Liquidity: Quick Ratio
(Cash + AR + Temporary Investments) / Current Liabilities
-Measures a company’s ability to cover its short-term liabilties using its most liquid assets)
-Quick ratio < 1: Company may have trouble meeting its short-term obligations without relying on inventory sales
Solvency: Debt-to-equity Ratio
Long term debt / Shareholder’s equity
-Shows how much the company relies on borrowing (debt) versus shareholder’s funds (equity) to fund its operations
-A high D/E ratio means the company is using more debt to finance its growth (increases financial risk)
-A D/E ratio of 2.0 means that the company has $2 of debt for every $1 of equity
Solvency: Interest Coverage Ratio
Income before interest and taxes / Interest expense
-A high ratio indicates the company is generating sufficient earnings to easily cover its interest expenses (financially stable, less risky for lenders)
-A TIE ratio of 5 means the company can cover its interest payments 5 times
Profitability Analysis - Gross Profit %
Gross Profit / Sales
-How much profit a company makes on its sales after subtracting costs of production
-Higher gross profit margin indicates the company is able to sell its products at a significant markup above the cost of producing them
Profitability Analysis - Return on Sales
Net Income / Sales
-How much profit a company is making for every dollar of sales
-Higher ROS indicates that a company is effectively converting sales into profits
-ROS of 4% means that they earn $0.04 of operating income for every $1 of sales
Profitability Analysis - Return on Assets
Net Income / Average total assets
-How efficiently a company uses its assets to generate profit
-A higher ROA indicates higher efficiency in converting investment in assets into net income
-A ROA of 8% means that they earn $0.08 in net income for every $1 of assets
Profitability Analysis - Return on Equity
Net Income / Average shareholder’s equity
-How effectively a company uses shareholders’ equity to generate net income
-A higher ROE indicates better financial performance and efficient use of equity capital
-A ROE of 10% means that they have $0.10 in net income for every $1 of equity
Asset Management Ratios - Inventory Turnover
COGS / Average Inventory
-How many times a company’s inventory is sold and replaced
Asset Management Ratios - Days Sales in AR
Average AR / (Net Credit Sales/365)
-Measures how long it takes a company to collect payment after a sale
-A lower DSO means the company collects payments quickly, improving cash flow
Asset Management Ratios - Asset Turnover
Sales / Average Total Assets
-Measures how efficiently a company uses its assets to generate revenue
-Analyzes operational efficiency vs. return on assets analyzes overall financial performance/profitability (how well assets generates profit)
Asset Management Ratios - AR Turnover
Net Credit Sales / Average AR
-Tells you how many times in a year a company collects its AR
-A higher turnover means the company is collecting its receivable more frequently and efficiently
