Week 2 Flashcards
(19 cards)
What are liquidity ratios
Ratios that measure the ability of a firm to meet short term obligations
What are some liquidity ratios
- Current ratio
- Cash ratio
- Quick ratio
- Defensive interval ratio
- Cash conversion Cycle
What is the formula for quick ratio
Quick assets / current liabilities
Quick assets= = (Cash + ST investments) + Receivables
What is the Defensive interval ratio
Quick assets/ Daily Cash expenditures (ebitda)
or quick assets/ EBITDA
tells us how long a company can continue to operate using only its liquid assets without needing to tap into long-term assets or generate additional revenue
How do we calculate the cash conversion cycle
Days of inventory on hand (DIO)+ days receivable outstanding (DSO) - days payable outstanding (DPO)
Shows greater liquidity if lower as it shows that you can quickly get cash
what are solvency ratio
A Ratio that shows a company’s ability to meet its long-term financial obligations
What are some examples of solvency ratios
- debt to asset ratio
- debt to capital ratio
- debt to equity ratio
- total debt ratio
- book value of equity
- market value
What is debt to assets ratio
what is debt to capital ratio
Total debt/ total assets
Total debt/ (total debt + total equity)
What is the formula for debt to equity ratio and the Fula for financial leverage ratio
Total deb/ total equity
Total assets/ total equity
What are coverage ratios
Ratios that can look at how much a company can pay its interest on its debt
What are the 4 main coverage ratios
Interest coverage
Fixed charge coverage
Cash interest coverage
Cash flow debt coverage
What is the formula for interest coverage ratio?
(EBT+interest expense)/ interest expense
What is the formula for fixed charge coverage ratio
(EBT+interest expense+ lease expense)/ interest expense+lease expense
What is the formula for cash interest coverage
(Cash flow from obligations+tax paid+interest paid)/interest expense
or EBITDA+Tax and Interest/ Interest
What is the cash flow debt coverage formula
Cash flow from operations/ total debt
OR
Operating cash flow/ Total Debt
How do we calculate cash flow from operations
Net cash from operating activities- interest paid + dividends+ interest received
or EBITDA+ interest expence
What does it mean when the interest coverage ratio is low
It means they have less operating profits to meet interest payments- I.e company is more volatile to interest payments
what does it mean if the cash conversion cycle is negative or positive
If CCC is Negative:
This means the company collects cash from customers before paying its suppliers.
if it is positive This means the company takes longer to recover its cash than it takes to pay its suppliers.
what is the formula for interest coverage ratio
EBIT/ interest expense
