Ratios Flashcards Preview

Financial Management > Ratios > Flashcards

Flashcards in Ratios Deck (24):

Current ratio =

Current Assets / Current Liabilities


Acid-test ratio =

(cash + accounts receivable) / current liabilities


Days in receivables =

accounts receivable /
(annual credit sales / 365)


Accounts receivable turnover =

annual credit sales /
accounts receivable


Days in inventory =

inventory /
(annual cost of goods sold / 365)


Inventory turnover =

cost of goods sold /



a firm’s ability to pay its bills on time. Liquidity is related to the ease and speed with which a firm can convert its noncash assets into cash, as well as to the size of the firm’s investment in noncash assets relative to its short-term liabilities.


Current ratio

a firm’s current assets divided by its current liabilities. This ratio indicates the firm’s degree of liquidity by comparing its current assets to its current liabilities.


Acid-test (quick) ratio

the sum of a firm’s cash and accounts receivable divided by its current liabilities. This ratio is a more stringent measure of liquidity than the current ratio because it excludes inventories and other current assets (those that are least liquid) from the numerator.


Days in receivables (average collection period)

a firm’s accounts receivable divided by the company’s average daily credit sales (annual credit sales ÷ 365). This ratio expresses how rapidly the firm is collecting its credit accounts.


Accounts receivable turnover ratio

a firm’s credit sales divided by its accounts receivable. This ratio expresses how often accounts receivable are “rolled over” during a year.


days in inventory

inventory divided by daily cost of goods sold. This ratio measures the number of days a firm’s inventories are held on average before being sold; it also indicates the quality of the inventory.


Inventory turnover

a firm’s cost of goods sold divided by its inventory. This ratio measures the number of times a firm’s inventories are sold and replaced during the year (that is, the relative liquidity of the inventories).


Operating return on assets (OROA)

the ratio of a firm’s operating profits divided by its total assets. This ratio indicates the rate of return being earned on the firm’s assets.


Operating profit margin

a firm’s operating profits divided by sales. This ratio serves as an overall measure of operating effectiveness.


Total asset turnover

a firm’s sales divided by its total assets. This ratio is an overall measure of asset efficiency based on the relation between a firm’s sales and the total assets.


Asset efficiency

how well a firm is managing its assets.


Fixed asset turnover

a firm’s sales divided by its net fixed assets. This ratio indicates how efficiently the firm is using its fixed assets.


Debt ratio

a firm’s total liabilities divided by its total assets. This ratio measures the extent to which a firm has been financed with debt.


Times interest earned

a firm’s operating profits divided by interest expense. This ratio measures a firm’s ability to meet its interest payments from its annual operating earnings.


Return on equity

a firm’s net income divided by its total common book equity. This ratio is the accounting rate of return earned on the common stockholders’ investment.


Price/earnings ratio

the price the market places on $1 of a firm’s earnings.


Price/book ratio

the market value of a share of the firm’s stock divided by the book value per share of the firm’s reported equity in the balance sheet.


Economic Value Added

a company’s economic profits, as opposed to its accounting profits, which includes not only interest expense as a cost but also the shareholders’ required rate of return on their investment.