Test 1 Flashcards
(23 cards)
What are some other words for the term “profit”
Income and earnings
How do you calculate after tax operating income?
EBIT (1-tax rate)
How do you calculate Return on Assets (ROA)?
Net income/total assets
How do you calculate Return on Equity (ROE)?
Net income/shareholder’s equity
How do you calculate net profit margin (NPM)?
Net income/sales
How do you calculate operating profit margin (OPM)?
EBIT/sales
How do you calculate total assets turnover (TAT)?
Sales/total assets
How do you calculate days sales outstanding (DSO)?
Receivables / (sales/365)
How do you calculate inventory turnover (IT)?
Sales/inventories
How do you calculate fixed asset turnover (FAT)?
Sales/fixed assets
What does ROE show?
How much profit is generated for every dollar of equity on the balance sheet
What does ROA show?
How much profit generated for every dollar of assets
What does NPM show?
How many cents of profit generated one every dollar of sales
What does TAT show?
How efficiently assets are being used (higher number = more efficient)
Is it good for the TD/TA ratio to be high or low?
Low
What is TIE and is it better for it to be high or low?
TIE means “times earned interest” and it is how many times a company is able to make their interest payment. High is good.
What is DSO and is it better for it to be high or low?
DSO is “days sales outstanding” and it means how many days it takes for a business to collect it’s receivables. It is good for this number to be low.
What is IT and is it good for this to be high or low?
IT is inventory turnover and this is how many times a year that the business turns over it’s inventory. It is good for this to be high (shows they are circulating inventory frequently)
What does the P/E ratio show?
This shows how much investors are willing to pay for every dollar of earnings, the investors expectations for growth
What is the historical avg for P/E?
Between 14-17x
What does the price per share/book value per share show?
It shows if investors are willing to pay more than the price of the book value.
How do you calculate the difference in company and industry to determine if the difference is large enough to be significant?
(Industry - company) / industry
What are some cautions when looking at ratios?
- Seasonal factors
- Multi divisional companies can have different ratios, especially when products are different
- Window dressing: making statements look better than they are
