financial ratios Flashcards
(23 cards)
types of financial ratios
liquidity ratios, profitability ratios, leverage ratios, market ratios
liquidity ratios
measure the ability of a corporation to satisfy demands for cash as they arise in the near term, eg. payment of current liabilities
profitability ratios
measure various levels of return on sales, total assets employed and shareholder investment
leverage ratios
measure the financial structure of a corporation, its amount of relative debt and its ability to cover interest expense
market ratios
measure financial returns to shareholders and perceptions of the stock market about the corporation’s value
liquidity crisis
the inability to pay its current liabilities as they come due
working capital
the difference (a-b) between a company’s current assets (a) and current liabilities (b) at a point in time, the more the better
current ratio
expresses working capital as a proportion of current assets to current liabilities, indicating how many current asset dollars are available to pay current liabilities at a point in time (2:1 ideal)
acid test ratio
a more rigid test of liquidity calculated by separating current assets into quick (cash, short term investments, accounts receivable) and non quick ( inventory, prepaid expenses), after which quick current assets are divided by current liabilities (1:1 ideal)
accounts receivable collection period
establishes the average number of days needed to collect an amount due to the company, indicating the efficiency of collection procedures and is calculated as:
(avg. accounts receivable/net credit sales)*365 days
number of days of sales in inventory
measures the effectiveness of management decisions relate to inventory and it is calculated by an average inventory by the cost of good sold and multiplying the result by 365 days
gross profit ratio
indicates the percentage of sales revenue that is left to pay operating expenses expenses, creditor, interest, and income taxes after deducting cost of good sold the ratio is calculated as cross profit divided by net sales
operating profit ratio
indicates the percentage of sales revenue, left to cover interest and income taxes expenses after deducting cost of good sold and operating expenses and is calculated by dividing income from operations by net sales
net profit ratio
The percentage of sales revenue retained by the company after payment of operating expenses, interest, expenses, and income taxes. It is an index of performance that can be used to compare the company to others in the same industry and it is calculated by dividing net income by net sales.
sales to total assets ratio
helps to establish the number of sales dollars earned for each dollar invested in assets and calculated as net sales divided by average total assets
return on total assets ratio (ROA)
designed to measure the efficiency with which all of a company’s assets are used to produce income from operation and is calculated as income from operations divided by average total assets
❗️ expenses need to finance. The company operations are excluded from calculation, specifically interest, and income taxes.
return on shareholders’ equity ratio (ROSE)
measures how much net income was earned for the amount shareholders have invested in a business and is calculated as net income divided by average shareholders’ equity
debt to shareholders’ equity ratio
the proportion of creditors to shareholder claims and is calculated by divide and total liabilities by shareholders’ equity
times interest earned ratio
indicates the amount by which income from operations could decline before default on interest may result and is calculated by dividing income from operations by interest expense
the larger the ratio, the better creditors are protected
earnings per share (EPS)
establishes how much return has been earned for each outstanding share and is calculated by net income divided by number of common shares outstanding
if there are preferred share dividend, they are subtracted from net income
price earnings ratio
used as an indicator of the market’s expectations of a companies future performance and is calculated as market price per share divided by earning per share
dividend yield
indicates how large return in the form of dividends can be expected from an investment in company’s shares and calculated as dividend per share divided by market price per share
