RATIOS

Question 1

ROE (return on equity)

Answer 1

NET INCOME/TOTAL EQUITY

How much profit each dollar of common stockholders’ equity generates

Question 2

ROA (return on assets)

Answer 2

EBIT/TOTAL ASSETS

How effectively a company can earn a return on its investment in assets

Question 3

ROCE (return on capital employed)

Answer 3

EBIT/ CAPITAL EMPLOYED

Capital Employed = Equity + Dib (interest-bearing liabilities)

How much profit each dollar of employed capital generates

Question 4

Capital Employed

Answer 4

EQUITY + INTEREST BEARING LIABILITIES (Dib)

Question 5

RONA (return on operating net assets)

Answer 5

OPERATING PROFIT/OPERATING NET ASSETS

Operating net assets = Capital Employed/ Financial Assets

Financial Assets = Cash & cash equivalents + marketable securities

How much profit each dollar of operating net assets generates

Question 6

Operating net assets

Answer 6

Capital Employed/ Financial Assets

Question 7

Financial Assets

Answer 7

Cash & cash equivalents + marketable securities

Question 8

RECEIVABLES TURNOVER

Answer 8

SALES/AVERAGE RECEIVABLES

How many times a business can collect its average accounts receivable during the year

Question 9

INVENTORY TURNOVER

Answer 9

COGS/AVERAGE INVENTORY

How many times a company sold its total average inventory during the year

Question 10

PAYABLES TURNOVER

Answer 10

PURCHASES/AVERAGE TRADE PAYABLES

Purchases = Closing inventory - Opening Inventory + COGS

How many times a company can pay off its average accounts payable balance during the course of the year

Question 11

Purchases

Answer 11

Closing inventory - Opening Inventory + COGS

Question 12

TOA (ASSET TURNOVER)

Answer 12

SALES/ AVERAGE TOTAL ASSETS

How many sales are generated from each dollar of the company’s assets

Question 13

WORKING CAPITAL TURNOVER

Answer 13

SALES/AVERAGE WORKING CAPITAL

Working Capital = Current Assets - Current Liabilities

How many sales are generated from each dollar of company working capital

Question 14

Working Capital

Answer 14

Current Assets - Current Liabilities

Question 15

EQUITY RATIO

Answer 15

TOTAL EQUITY/TOTAL ASSETS

How much of the total company assets are financed by the owner’s investments

BENCHMARK >20%

Question 16

DEBT RATIO

Answer 16

TOTAL LIABILITIES/TOTAL ASSETS

How many assets the company must sell in order to pay off all of its liabilities

BENCHMARK <80%

Question 17

DEBT TO EQUITY RATIO

Answer 17

TOTAL LIABILITIES/TOTAL EQUITY

How many times there are more liabilities than equity in a company

Question 18

EQUITY MULTIPLIER

Answer 18

TOTAL ASSETS/TOTAL EQUITY

How many times assets are higher than stockholders’ equity

BENCHMARK <5

Question 19

INTEREST COVERAGE

Answer 19

EBIT/INTEREST EXPENSE

How many times a company can pay its interest expenses using EBIT

BENCHMARK >5

Question 20

CURRENT RATIO

Answer 20

CURRENT ASSETS/CURRENT LIABILITIES

How many times a firm is able to pay its short term liabilities with its current assets

BENCHMARK >2

Question 21

QUICK RATIO (Acid test)

Answer 21

(CURRENT ASSETS-INVENTORY)/CURRENT LIABILITIES

How well a company can quickly convert its assets into cash in order to pay off its current liabilities

BENCHMARK >1

Question 22

CASH AVAILABILITY

Answer 22

(CASH & CASH EQUIVALENTS + MARKETABLE SECURITIES) / CURRENT LIABILITIES

How many times a firm is able to pay off its current liabilities with cash

Question 23

CASH CONVERSION CYCLE

Answer 23

INVENTORY DAYS + DEBTOR DAYS - CREDITOR DAYS

Inventory Days = Average Inventory/COGS * 365
Debtor days = Average Receivables/Sales * 365
Creditor days = Average Payables/Purchases * 365

How long cash is tied up in inventory before the inventory is sold and cash is collected from customers

Question 24

Inventory Days

Answer 24

Average Inventory/COGS * 365

How long it takes the company to sell the inventory

Question 25

Debtor Days

Answer 25

Average Receivables/Sales * 365 How long it takes to collect cash from sales (of inventory)

Question 26

Creditor Days

Answer 26

Average Payables/Purchases * 365 How long it takes to pay off vendors

Question 27

Dividend Payout Ratio

Answer 27

Dividends/Net Income DPS/EPS (per share) How much is distributed to shareholders in the form of dividends during the year as a % of net income (1 - retention rate, 1- plowback ratio)

Question 28

Dividend Yield

Answer 28

DPS/Market Price of a share How much dividends investors are getting for every dollar that the stock is worth

Question 29

Price Earning Ratio (P/E)

Answer 29

Market Capitalization/Net Income Market price per share/EPS How many times more the market is willing to pay for the stock compared to what it is worth Market Capitalization = Market price per share * Number of shares (Market Value of Equity)

Question 30

ROE Dupont (2)

Answer 30

Net Income/Sales * Sales/Total Equity

Question 31

ROE Dupont (3)

Answer 31

Net Income/Sales * Sales/Total Assets * Total Assets/Total Equity

Question 32

ROE Dupont (5)

Answer 32

``` Net Income/Pretax Profit * Pretax Profit/EBIT * EBIT/Sales * Sales/Total Assets * Total Assets/Total Equity ``` Tax burden * interest burden * profit margin * asset turnover * equity multiplier

Question 33

ROA Dupont

Answer 33

EBIT/Sales * Sales/Total Assets

Question 34

ROCE Dupont

Answer 34

EBIT/Sales * Sales/Capital Employed

Question 35

Sustainable growth rate

Answer 35

ROE * (1 - dividend payout ratio) | ROE * plowback ratio

Question 36

ROE leverage formula using ROA

Answer 36

(1-t) (ROA+(ROA-COD) * D/E) COD (cost of debt) = Interest expense/Total liabilities

Question 37

COD (cost of debt)

Answer 37

Interest expense/Total liabilities

Question 38

ROE leverage formula using ROCE

Answer 38

(1-t) (ROCE + (ROCE-Rd) * Dib/E) Rd (cost of debt) = Interest expense/Dib

Question 39

Rd (cost of interest-bearing debt)

Answer 39

Interest expense/Dib

Question 40

ROE leverage formula using RONA

Answer 40

(1-t) (RONA + (RONA-Rnd) * ND/E) Rnd = (Interest Expense - Financial Income) /Net Debt Net Debt = Dib - Financial Assets = Dib - (Cash and cash equivalents + marketable securities)

Question 41

Rnd (cost of net debt)

Answer 41

(Interest Expense - Financial Income) /Net Debt

Question 42

Net Debt

Answer 42

Dib - Financial Assets = Dib - (Cash and cash equivalents + marketable securities)