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Flashcards in Ratios Deck (36):

Liquidity ratios

Liquidity ratios are measures of a firms short-term ability to pay maturing obligations


Activity ratios

Activity ratios are measures of how effectively an enterprise is using its assets


Profitability Ratios

Profitability ratios measure the financial performance of an enterprise for a given time period


Investor Ratios

Investor ratios are measures that are of interest to investors


Long-term Debt-Paying ability ratios(Coverage ratios)

Coverage ratios are measures of security for long-term creditors/investors


Working Capital Formula

Current assets- Current Liabilities


Current ratio(working capital ratio)

Current assets/current Liabilities

Ability to meet short term obligations


Acid-test ratio

(Cash equivalents + Marketable Securities + Accounts Receivable)/ Current Liabilities

Ability to meet short term needs


Cash ratio

(Cash equivalents + Marketable Securities)/ Current Liabilities


Accounts receivable turnover

Net credit sales/Average net receivables

The ability to successfully collect outstanding receivables. Faster turnover gives credibility to the current and acid-test ratios


Accounts receivable turnover in days

365/Receivable turnover

Average number of days to collect accounts receivable


Inventory turnover

Cost of goods sold/ Average inventory

This measures how quickly inventory is sold is an indicator of enterprise performance. The higher the turnover the better the performance


Inventory turnover in days

365/Inventory turnover

Indicates the average number of days required to sell inventory


Operating cycle

AR Turnover in days + Inventory turnover in days

The operating cycle indicates the number of days between acquisition of inventory and realization of cash from selling inventory.


Working Capital Turnover

Sales/Average working capital

This ratio indicates how ieffectively working capital is used


Total asset turnover

Net Sales/ Average total assets

Indicator of how effective use of its assets. High ratio indicates effective asset use to generate sales


Accounts payable turnover

Cost of goods sold/ Average accounts payable

this ratio indicates the number of times trade payables turn over during the year. A low turnover may indicate a delay in payment, such as from a shortage of cash


Days in accounts payable

365/Accounts payable turnover

this ratio indicates the average length of time trade payables are outstanding befor year end.


Net Profit Margin

Net Income/Net Sales

This ratio indicates profit rate, when used with the asset turnover ratio, indicates rate of return on assets.


Return on total assets

Net income / Average total assets


Return on assets

Net profit margin X Total asset turnover

Note that this ratio uses both profit margin and the total asset turnover. This ratio allows for increased analysis of the change in percentages. The net profit margin indicates the percent return on each sale while the asset turnover indicates the effective use of assets in generating that sale.


return on Investment

(Net income + Interest Expense(1-Tax rate))/Average( Long- term liabilities + equity)

ROI measures the performance of the firm without regard to the method of financing


Return on Common Equity

(Net Income- Preferred dividends)/ Average common equity

This ratio uses net income less preferred dividends in the numerator to better measure returns accruing to common shareholders.


Net operating margin percentage

Net operating income/ Net Sales


Gross(Profit) margin percentage

Gross (profit) margin/ Net Sales


Operating Cash flow per share

Operating cash flow/ Common shares outstanding


Degree of financial leverage

Earnings before interest and taxes/ earnings before taxes

The degree of financial leverage is the factor by which net income will change with a change in earnings before interest and taxes. This degree of financial leverage indicates the leverage factor for recurring earnings.


Earnings per share

(Net Income-Preferred dividends)/ Weighted average number of common shares outstanding


Price/earnings ratio

Market price per share/ Diluted earnings per share

This statistic indicates the investment potential of an enterprise; a rise in this ratio indicates that investors are pleased with the firm's opportunity for growth.


Dividend payout ratio

Dividends per common share/ Diluted earnings per

This ratio indicates the portion of current earnings being paid out in dividends


Dividend yield

Dividends per common share/ Market price per common share

This ratio indicates the relationship between dividends and market priced


Book value per share

(Total stockholders' equity - Preferred stock)/ Number of common shares outstanding

This ratio indicates the amount of stockholder's equity that relates to each share of common stock. Note that preferred stock should be stated at liquidity value if other than book value



Total liabilities/ common stockholders' equity

This ratio indicates the degree of protection to creditors in case of insolvency. The lower this ratio the better the company's position.


Debt ratio

total Liabilities/ Total Assets

This debt ratio indicates that more than half of the assets are financed by creditors


Times interest earned

earnings before taxes and interest/ Interest

This ratio reflects the ability of a company to cover interest charges. It uses income before interest and taxes to reflect the amount of income available to cover interest expense.


Operating cash flow/ Total debt

Operating cash flow/ Total debt

This ratio indicates the ability of the company to cover total debt with yearly cash flow.