ratios Flashcards
(18 cards)
What does Return on Equity (ROE) measure?
Formula: Net earnings ÷ Average shareholders’ equity
Measures how well the company uses shareholders’ equity to generate profits.
High is good.
What does Return on Assets (ROA) indicate?
Formula: Net earnings ÷ Average total assets
Indicates how efficiently assets are used to produce net income.
High is good.
What does Gross Profit Margin show?
Formula: Gross profit ÷ Net sales
Shows how much profit remains after covering the cost of goods sold.
High is good.
What does Net Profit Margin reveal?
Formula: Net earnings ÷ Net sales
Shows how much of each dollar of sales turns into net profit.
High is good.
What does Earnings per Share (EPS) indicate?
Formula: Net earnings available to common shareholders ÷ Average common shares outstanding
Profitability per individual share.
High is good.
What does Quality of Earnings Ratio assess?
Formula: Cash flows from operating activities ÷ Net earnings
Assesses whether earnings are backed by real cash flow.
High is good.
What does Total Asset Turnover measure?
Formula: Net sales ÷ Average total assets
Measures how effectively assets are used to generate sales.
High is good.
What does Fixed Asset Turnover show?
Formula: Net sales ÷ Average net fixed assets
Shows how well fixed assets are used in revenue generation.
High is good.
What does Receivables Turnover mean?
Formula: Net credit sales ÷ Average net accounts receivable
How often receivables are collected during the year.
High is good.
What does Inventory Turnover indicate?
Formula: Cost of sales ÷ Average inventory
How often inventory is sold and replaced in a year.
High is good, but depends on the industry.
What does Current Ratio show?
Formula: Current assets ÷ Current liabilities
Shows whether the company can cover short-term liabilities.
Moderately high is good.
What does Quick Ratio measure?
Formula: Quick assets ÷ Current liabilities
A stricter version of current ratio that excludes inventory.
High is good.
What does Cash Ratio assess?
Formula: (Cash + Cash equivalents) ÷ Current liabilities
Measures if a company can pay short-term liabilities using just cash.
Very high isn’t always better, but higher is generally safer.
What does Times Interest Earned (TIE) indicate?
Formula: (Net earnings + Interest + Income taxes) ÷ Interest expense
Indicates how easily a company can pay its interest expenses.
High is good.
What does Cash Coverage Ratio measure?
Formula: Cash from operations (before interest and taxes) ÷ Interest paid
Similar to TIE, but based on actual cash instead of earnings.
High is good.
What does Debt-to-Equity Ratio show?
Formula: Total liabilities ÷ Shareholders’ equity
Shows the proportion of debt used to finance the business.
Low to moderate is good.
What does Price/Earnings (P/E) Ratio represent?
Formula: Market price per share ÷ Earnings per share
Shows how much investors are paying for $1 of earnings.
Moderately high is good.
What does Dividend Yield Ratio indicate?
Formula: Dividends per share ÷ Market price per share
Shows how much return in dividends investors receive.
Moderate is good.
