Financial Ratios pt. 2 (20.3)

Question 1

debt-to-equity ratio

Answer 1

A measure of the firm’s use of fixed-cost financing sources is the debt-to-equity ratio:

debt-to-equity=total debt / total shareholders’ equity

Question 2

debt-to-capital ratio

Answer 2

debt-to-capital=total debt / (total debt+total shareholders’ equity)

Capital equals all short-term and long-term debt plus preferred stock and equity. Increases and decreases in this ratio suggest a greater or lesser reliance on debt as a source of financing.

Question 3

debt-to-assets ratio

Answer 3

debt-to-assets=total debt / total assets

Increases and decreases in this ratio suggest a greater or lesser reliance on debt as a source of financing.

Question 4

financial leverage ratio

Answer 4

financial leverage=average total assets / average total equity

Question 5

interest coverage ratio

Answer 5

interest coverage = earnings before interest and taxes / interest payments

Question 6

debt-to-EBITDA ratio

Answer 6

Because depreciation and amortization are not cash expenses, another ratio that reflects a firm’s ability to meet its debt obligations is the debt-to-EBITDA ratio:

debt-to-EBITDA =total debt / EBITDA

Question 7

fixed charge coverage ratio

Answer 7

Another indicator of a company’s ability to meet its obligations is the fixed charge coverage ratio:

fixed charge coverage=(earnings before interest and taxes+lease payments) / (interest payments+lease payments)

Question 8

net profit margin

Answer 8

net profit margin=net income / revenue

Question 9

gross profit margin

Answer 9

gross profit margin=gross profit / revenue

Question 10

operating profit margin

Answer 10

The operating profit margin is the ratio of operating profit (gross profit less selling, general, and administrative expenses) to sales. Operating profit is also referred to as earnings before interest and taxes (EBIT):

operating profit margin=

operating income /revenue
or
EBIT / revenue

Question 11

pretax margin

Answer 11

pretax margin=EBT / revenue

Question 12

return on assets (ROA)

Answer 12

return on assets (ROA)=net income / average total assets

Question 13

operating return on assets

Answer 13

operating return on assets =

operating income / average total assets
or
EBIT / average total assets

Question 14

return on total capital

Answer 14

return on total capital = EBIT / average total capital

Question 15

return on equity

Answer 15

return on equity = net income/ average total equity

Question 16

return on common equity

Answer 16

return on common equity=(net income – preferred dividends) / average common equity

Question 17

pure ratios vs. not pure

Answer 17

pure ratios: numerator and denonminator are either BOTH from income statement, or BOTH from balance sheet. in this case, use the most recent income statement and most recent balance sheet.

if not pure, use most recent income statement and the AVG of the balance sheets.