Flashcards in Ratios Deck (42)

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1

## Current ratio

###
current assets/current liabilities

*measures ability to discharge currently maturing obligations from existing current assets

2

## What is the limitation on the current ratio?

### BS account totals based on historical costs do not necessarily represent market values. A sizable amount of the current asset total might be tied up in inventory which is less liquid. Implies liquidation of assets and elimination of liabilities

3

## Quick ratio (acid test)

###
current assets less inventories and prepaid assets/current liabilities

* measures ability to discharge currently maturing obligations based on most liquid (quick) assets

4

## What is the limitation of the quick ratio?

### receivables may be subject to a lengthy collection period and might have to be factored at less than carrying value if cash is needed immediately. Securities are subject to fluctuation market conditions which affect their liquidation amount

5

## Inventory turnover

###
COGS/average inventory

* measures relative control over inventory investment. May provide basis for determining the presence of obsolete inventory or pricing problems (in case of low turnover)

6

## What are the limitations of inventory turnover?

### Different inventory cost flow assumptions can produce widely different inventory valuations and thus turnover ratios

7

## Receivables turnover

###
net credit sales/average receivables

* confirms the fairness of the receivable balance. May indicate presence of possible collection problems (in case of low turnover)

8

## What are the limitation of receivables turnover?

### affected by significant seasonal fluctuations unless denominator is a weighted average. Poor collection policy can understate this ratio by increasing average receivables

9

## Cash from operating activities to current liabilities

###
net cash provide by operating activities/current liabilities

* shows extent to which a company has covered its current liabilities by generation cash from normal operations.

10

## What is the limitation on cash from operating activities to current liabilities?

### current liabilities may understate ST demands on cash

11

## Total asset turnover

###
net sales/average total assets

* measures how efficiently assets are used to produce sales

12

## What are the limitations of total asset turnover?

### does not take into account that certain assets make no tangible contribution to sales. Assumes that an asset's participation in generating sales is relative to its recorded amount. Rate of return is based on historical cost which does not reflect current values

13

## Rate of return on total assets

###
net income plus interest expense (net of tax effect)/average total assets

* measures the productivity of assets in terms of producing income

14

## What are the limitations on rate of return on total assets?

### Similar to asset turnover ratio. Accrual net income subject to estimates and does not reflect actual cash return. Rate of return is based on historical asset cost which does not reflect current values.

15

## Return on common stockholder's equity

###
net income less preferred dividends/average common stockholder's equity

* measures return on common stockholders in aggregate

16

## What are the limitations of return on common stockholders' equity?

### Book value of common stockholders' equity reflects historical cost and not current value. Accruals net income involves estimates and does not reflect actual cash return

17

## Debit ratio

###
Total liabilities/total assets

*indicates extent of leverage used and creditor protection in case of insolvency

18

## What is the limitation of deb ratio?

### Denominator reflects historical costs and not current values

19

## Debt/equity ratio

###
total liabilities/shareholder's equity

*determines the equity's LT debt paying ability

20

## What is the limitation on debt/equity ratio?

### there is a lack of uniformity in calculating this ratio

21

## Equity ratio

###
Total stockholder's equity/total assets

* measures total asset investment provided by stockholders

22

## What are the limitations of equity ratio?

### assets are recorded at historical cost and not at current value

23

## Times interest earned

###
income before interest expenses and taxes/interest expense

*measures ability to cover interest charges

24

## What are the limitations of times interest earned?

### Accrual income does not necessarily indicate availability of cash to pay interest charges

25

## Price-earnings ratio

###
market price per common share/earning per share

*indicated relationship of common stock to net earnings

26

## What are the limitations of price-earnings ratio?

### earning per share computation subject to arbitrary assumptions and accrual income. EPS is not the only factor affecting market prices

27

## Dividend yield

###
dividend per common share/market price per common share

*shows return to stockholders based on current market price of stock

28

## What are the limitations of dividend yield?

### dividend payments to stockholders are subject to many variables. The relationship between dividends paid and market prices is a reciprocal one

29

## Profit margin on sales

###
net income/sales

*measures efficiency of earning income from sales

30