More Financial Ratios (20.5) Flashcards
What is the most widely used valuation ratio?
The most widely used valuation ratio is the price-to-earnings (P/E) ratio, the ratio of the current market price of a share of stock divided by the company’s earnings per share.
How to calculate a companys’ sustainable growth rate?
The formula for the sustainable growth rate, which is how fast the firm can grow without additional external equity issues while holding leverage constant, is:
g = RR × ROE
*Note RR is retention rate, Net income minus dividends declared is retained earnings.
How is a companys’ retention rate calculated?
Net income minus dividends declared is retained earnings.
The calculation of the retention rate is:
retention rate= (net income available to common – dividends declared) / net income available to common
=1 – dividend payout ratio
where:dividend payout ratio =dividends declared / net income available to common
how is the dividend payout ratio calculated?
dividends declared / net income available to common
how to calculate coefficient of variation for sales
CV sales=standard deviation of sales / mean sales
how to calculate coefficient of variation for operating income
CV operating income=standard deviation of operating income / mean operating income
how to calculate coefficient of variation for net income
CV net income= standard deviation of net income / mean net income
Describe capital adequacy
Capital adequacy typically refers to the ratio of some dollar measure of the risk, both operational and financial, of the firm to its equity capital. Other measures of capital are also used. A common measure of capital risk is value-at-risk, which is an estimate of the dollar size of the loss that a firm will exceed only some specific percent of the time, over a specific period of time.
Describe the liquid asset requirement
Banks are subject to minimum reserve requirements. Their ratios of various liabilities to their central bank reserves must be above the minimums. The ratio of a bank’s liquid assets to certain liabilities is called the liquid asset requirement.
What is net interest margin and how is it caculated
The performance of financial companies that lend funds is often summarized as the net interest margin, which is simply interest income divided by the firm’s interest-earning assets.
Does a low, or a high, z-score show high probability of failure for a company?
a low score indicates high probability of failure
define business segment
A business segment is a portion of a larger company that accounts for more than 10% of the company’s revenues, assets, or income, and is distinguishable from the company’s other lines of business in terms of the risk and return characteristics of the segment.
define Geographic segments
Geographic segments are also identified when they meet the size criterion of a business segment, and the geographic unit has a business environment that is different from that of other segments or the remainder of the company’s business.
