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C 214: Financial Management > Ratio Analysis > Flashcards

Ratio Analysis Flashcards

1
Q

Process of using financial analysis to determine the health of a firm

A

Ratio Analysis

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2
Q

Ratio Analysis is a popular tool for three reasons

A

Standardization
Flexibility
Focus

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3
Q

One of the four classifications of ratios designed to measure the ability of a firm to pay its near-term obligations

A

Liquidity Ratios

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4
Q

Liquidity Ratios speak to a firm’s ability to meet

A

Short-Term Obligations

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5
Q

Most Common Liquidity Ratios

A

Current Ratio
Quick Ratio
Accounts Receivable Turnover
Average Collection Period
Inventory Turnover
Days on Hand

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6
Q

Current Assets / Current Liabilities

A

Current Ratio

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7
Q

Higher current ratios are usually interpreted to mean

A

better likelihood that the firm will be able to meet its short-term obligations

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8
Q

(Current Assets- Inventory) / Current Liabilities

A

Quick Ratio

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9
Q

A company with a high quick ratio is usually viewed as having

A

Greater ability to meet short-term obligations

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10
Q

Credit Sales / Accounts Receivable

A

Accounts Receivable Turnover

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11
Q

Accounts receivable turnover describes

A

The number of times a firm’s AR account turns over in a year

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12
Q

An AR ratio of 12 means

A

The company collects its entire AR 12 times a year, or about once a month

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13
Q

365/AR Turnover

A

Average Collection Period (ACP)

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14
Q

These two ratios can provide the same information

A

Average Collection Period and Accounts Receivable Turnover

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15
Q

COGS/Inventory

A

Inventory Turnover

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16
Q

Inventory Turnover is the number of times the firm

A

Turns over (sells) inventory annually

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17
Q

365 / Inventory Turnover

A

Days on Hand (DOH)

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18
Q

DOH simply converts the inventory turnover into a

A

Day count metric

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19
Q

If inventory turnover is 2, the firm has about how many days of inventory on hand?

A

180
(365/2)

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20
Q

One of the four classifications of ratios designed to see how well the firm is using its assets and investments

A

Efficiency Ratios

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21
Q

Efficiency ratios measure how effectively a company/management team uses assets to

A

Generate sales or profits

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22
Q

The most commonly used efficiency ratios are

A

Total Asset Turnover (TAT)
Fixed Asset Turnover (FAT)
Operating Income Return on Investment (OIROI)

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23
Q

Sales / Total Assets =

A

Total Asset Turnover

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24
Q

A TAT of three indicates that for every $1 of assets,

A

the firm is generating $3 in sales

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25
Q

Sales / Fixed Assets =

A

Fixed Asset Turnover

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26
Q

Fixed assets include all

A

Non-Current Assets, or total assets minus current assets

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27
Q

Managers with low risk tolerance will maintain

A

Higher Current Asset Levels

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28
Q

A company’s fixed asset holdings are largely determined by

A

the industry in which it operates

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29
Q

EBIT/Total Assets =

A

Operating Income Return on Investments (OIROI)

30
Q

OIROI describes the relationship between

A

operating profit (EBIT) and the company’s asset base

31
Q

OIROI tells us

A

how much pre-tax, pre-financing profit the company generates per dollar of assets

32
Q

All assets must be

A

Financed

33
Q

One of the four classifications of ratios designed to measure how the firm finances its operations

A

Financing Ratios

34
Q

Common Financing Ratios are

A

Debt Ratio
Interest-Bearing Debt to Total Capital
Times Interest Earned Ratio
Financial Leverage Ratio

35
Q

Total Liabilities / Total Assets

A

Debt Ratio

36
Q

The debt ratio measure the proportion of

A

the firm’s assets financed with debt

37
Q

A debt ratio of .4 means

A

for every dollar of assets held by the firm, 40 cents is financed with debt

38
Q

Interest-Bearing Debt / (Interest-Bearing Debt + Owners’ Equity) =

A

Interest Bearing Debt to Total Capital (IBDTC)

39
Q

Interest-Bearing Debt to Total Capital is a more precise measure of a firm’s

A

financial structure

40
Q

EBIT / Interest Expense =

A

The Times Interest Earned (TIE) Ratio

41
Q

The Times interest earned ratio tells us how many times a company

A

can pay interest expense given operating profit

42
Q

Total Assets / Equity =

A

Financial Leverage Ratio (FLR)

43
Q

The Financial Leverage Ratio is similar to the

A

Debt Ratio

44
Q

One of the four classifications of ratios designed to measure the profitability of the firm

A

Profitability Ratios

45
Q

Common Profitability Ratios are:

A

Return on Assets
Return on Equity
Gross Margin
Operating Margin
Net Margin

46
Q

Net Income / Total Assets

A

Return on Assets

47
Q

Net Income / Owners’ Equity

A

Return on Equity

48
Q

One of the most important metrics by which managers are evaluated

A

Return on Equity

49
Q

A firm that is effectively using debt will have an ROE that _______ ROA

A

Exceeds

50
Q

Gross Profit / Sales

A

Gross Margin

51
Q

Gross margin measures the percent of revenue remaining after the

A

Cost of Goods Sold

52
Q

High gross margins are usually associated with

A

an efficient production process

53
Q

EBIT/ Sales =

A

Operating Margin

54
Q

The percent of sales remaining after covering the costs of goods sold AND operating expenses

A

Operating Margin

55
Q

Operating margin is frequently compared with

A

different capital structures

56
Q

The portion of a firm’s assets that are financed by either liabilities (debt) or by equity

A

Capital Structures

57
Q

The mix of debt and equity is referred to as the

A

Capital Structure

58
Q

Net Income / Sales

A

Net Margin

59
Q

Measures the percent of revenue that drops to the bottom line

A

Net Margin

60
Q

All ratio analysis should be

A

integrative

61
Q

The DuPont equation indicates that ROE is a function of

A

operating efficiency

62
Q

The DuPont equation indicates that TAT is a function of

A

Asset Efficiency

63
Q

The DuPont equation indicates that FLR is a function of

A

Financing policy

64
Q

The three main comparison standards for ratio analysis

A

Trend Analysis
Cross-Sectional Analysis
Internal Goal Monitoring

65
Q

An analysis used to examine a firm’s ratios over time

A

Trend Analysis

66
Q

Frequently, trend analysis looks back

A

5 years

67
Q

The trend analysis can sometimes forecast forward

A

3 years

68
Q

An analysis used to compare a firm’s ratios to a peer group

A

Cross-Sectional Analysis

69
Q

Ratios can measure progress relative to specific goals set within the company

A

Internal Goal Monitoring

70
Q
A

C 214: Financial Management (9 decks)

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