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Finance Exam 2 > Ratios > Flashcards

Ratios Flashcards

(71 cards)

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1
Q

In order to compute a meaningful ratio…?

A

There must be a significant relationship between the two

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2
Q

Define ratio analysis

A

Mathematical method using income statement and balance sheet data to detect trends
- Gives us a way to compare our business to another

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3
Q

Examples of ratio analysis

A

Inventory and credit management problems
Poor pricing policies
Declining sales and profitability

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4
Q

Does the business earn adequate profits?

A

Tests of Profitability

Ratio that help determine if the business is earning adequate profits

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5
Q

Are funds available to the business and its management being used wisely?

A

Debit and equity (money borrowed and money put in)

Ratio that helps determine if funds are being used wisely by the business: Test of Overall Performance

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6
Q

Can the firm pay its short term debts as they come due?

A

The ability to pay short term debts is liquidity

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7
Q

Can the firm pay its long term debts on a continuing basis?

A

Ability is known as solvency

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8
Q

A solvent company is one that?

A

Owns more than it owes

Positive net worth and manageable debt load

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9
Q

A company with adequate liquidity but not solvency, is one that?

A

Enough cash available to pay its bills but has a negative net work and debt load that is not manageable

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10
Q

How efficiently are the firm’s assets being managed?

A

Minimize assets (inventory receivable) to generate sales and income

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11
Q

Test of Profitability indicates?

A

The pharmacy’s ability to cover its expenses plus some excess to reward its owners

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12
Q

Test of Profitability includes?

A

GM %

Net Income %

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13
Q

Define Gross Margin Percent

A

Measure of profitability before expenses are considered

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14
Q

Gross Margin Percent Formula

A

(Sales-COGS)/Sales x100

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15
Q

GM% means

A

that much of each dollar of sales is available to cover expenses and profit

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16
Q

Low GM% might result from?

A

Low prices
Improper purchasing
Shoplifting or other theft
Owners or employees not ringing up sales right

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17
Q

Normal Pharmacy GM% is?

A

22-28%

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18
Q

Define Net Income Percentage

A

Measure of the profitability after expenses are consider

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19
Q

NI% Formula

A

Net income/sales x100

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20
Q

NI% tells you?

A

that amount of every dollar of sales is available to cover profit
Tells the owner how much you are making!

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21
Q

NI can increased by?

A

Raising prices without effecting sales
Purchase goods at lower cost
Decreasing expenses

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22
Q

Normal Net Income for pharmacies?

A

2-5%

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23
Q

Define Test of OVerall Performance

A

Indicates if funds (debt and equity) available to the business and its management are being used wisely

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24
Q

Debit consist of

A

funds borrowed by the business

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25
Equity consist of
funds that the owners have invested in the business
26
Test of overall performance are
Return on equity | Return on assests
27
Return on Equity
How effectively are funds invested in the firm have been used Making enough money to make the risk of being in business for owners
28
ROE =
Net income/OE x100 | For every dollar they invest, they get X amount cents back
29
How can ROE be altered?
Increase NI Decrease expenses Decrease OE
30
How can you decrease OE?
Borrow more funds and withdraw capital (financial leverage) Decrease assets Hold less inventory
31
What is the normal ROE?
20%+
32
ROA
Measures how effectively all funds available to the manager have been used to generate a return
33
ROA =
NI/total assets x 100 | For every dollar we invested, you receive X cents of income
34
How can you alter Return on Assets?
Increase NI Decrease assets Manage accounts receivable and inventories
35
Normal ROA?
Greater than 10% (13-15%)
36
Define Test of Liquidity
Can the firm pay its short term debt as they come due
37
Tests of liquidity are
Current Ratio Quick Ratio Accounts payable period
38
Current Ratio
compares a pharmacy's current assets (supply cash to pay current debt) with its current debt
39
CR =
Current assets/current liabilities | Tells you how many dollars of current assets for every dollar of current liability
40
Creditors prefer:
high CR (between 2-3.8)
41
Quick Ratio
Acid Test Measures the excess of very liquid current assets Could the firm pay its current debt if it were not able to sell its inventory
42
QR =
(current assets - inventory)/current liabilities | X dollars of very current assets for every dollar of current liabities
43
QR should be
1.1-2
44
Accounts Payable Period indicates
how long it takes the pharmacy to pay for its credit purchases Avg # of days between when a pharmacy makes a purchase on credit and when it pays for the puchase
45
APP =
Accounts Payable/Purchases per day | X days between when the pharmacy makes a purchase on credit and when it pays for the purchase
46
APP average
21 days
47
Debt to equity ratio measures
A business' abiliity to meet its long term debt payments | Compare about the pharmacy has borrowed to the OE
48
Debit vs Equity
Debit must be repaid according to a set schedule regardless of whether the firm is profitable Equity is funds that have been invested in the business
49
Debit to Equity Ratios are
Current liabilities to OE Long term debit to OE Total debit to OE Financial leverage
50
Financial leverage equation
(Total Debit + OE) /OE
51
Lenders prefer that pharmacies have _____ debt to equity
low
52
Low debit to equity ratios indicates
the owner has more invested in the business than the bank does, owner should have a strong incentive to do well
53
Normal debit to equity ratios
50%-80%
54
Tests of efficiency
How efficiently the pharmacy's assets are being used | Given level of activity with the smallest possible investment in assets
55
Test of efficiency are
Accounts Receivable Collection Period Inventory turnover Asset turnover
56
Two test of efficiency for hospital
Hospital inventory turnover | Personnel expense per occupied bed
57
Accounts Receivable Collection Period
An estimate of the average number of days it takes the pharmacy to collect an account receivable Should be no greater than 1.5X the firms credit terms
58
Longer periods of time indicate
poor credit management or customers are not paying on time
59
ARCP =
Accounts receivable/net credit sales per day
60
Inventory turnover
Measures the rate of movement of inventory | Indicates that the pharmacy is being run with a minimum investment in inventory
61
If the ITO is too high
Pharmacy may frequently find itself out of stock
62
How can you increase ITO
increasing sales without increasing inventory or decreasing inventory while maintaining sales
63
ITO =
Cost of goods sold/average inventory at cost
64
Asset turnover
Measures how efficiently the pharmacy's total assets are used
65
High ATO indicates that,
The pharmacy is being operated with minimum investment in assets
66
How can you improve ATO
Increase sales while holding asset investment constant | Decreasing asset investment while increasing or maintaining sales
67
ATO =
Sales/total assets
68
Hospital inventory turnover (HITO) =
Annual purchases at costs/average inventory at cost
69
Normal HITO
10.6
70
Personnel Expense Per Occupied Bed
Total annual pharmacy payroll/occupied beds (= # of licensed beds X average occupancy rate)
71
Normal PEPOB
$4,559

Finance Exam 2 (7 decks)

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