Week 8 - Lecture 8 Flashcards
(22 cards)
What is the formula for Working Capital?
Current assets - current liabilities
Too much working capital may indicate idle funds.
What does the Current Ratio measure?
Current assets per $1 of liabilities
Rule of thumb is ~1.5 times in absence of industry benchmark.
What is the formula for the Current Ratio?
Current Assets / Current Liabilities
This ratio indicates the liquidity of a company.
What is the interpretation of the Quick (Acid-Test) Ratio?
Excludes inventory; liquid assets per $1 of liabilities
Rule of thumb is ~0.8 times if no industry data.
What is the formula for the Quick Ratio?
(Current Assets - Inventory) / Current Liabilities
This ratio assesses immediate liquidity.
What does the Cash Flow Ratio reflect?
Entire period’s cash available to meet short-term obligations
Advantageous as it is a dynamic measure.
What is the formula for the Cash Flow Ratio?
Net Cash Flows from Operating Activities / Current Liabilities
Helps evaluate liquidity over a period.
What does a Debt to Equity ratio greater than 100% indicate?
More debt than equity
Less than 100% indicates more equity than debt.
What is the formula for the Debt Ratio?
Total Liabilities / Total Assets × 100%
Indicates the percentage of assets financed by debt.
What is the formula for the Equity Ratio?
Total Equity / Total Assets × 100%
Indicates the percentage of assets financed by equity.
What does the Interest Coverage Ratio measure?
How many times earnings cover interest expense
Rule of thumb is ≥ 3 times to comfortably cover interest.
What is the formula for Interest Coverage?
EBIT / Net Finance Costs
A higher ratio indicates better ability to pay interest.
What is Net Tangible Asset Backing (NTAB) per Share?
(Ordinary Equity - Intangible Assets) / # Ordinary Shares
Compares tangible asset value to market price.
What does Earnings per Share (EPS) represent?
Profit available per share
Higher EPS attracts investors.
What is the formula for Dividend per Share (DPS)?
Dividends Paid to Ordinary Shareholders / Weighted # of Shares
Indicates return in dividends per share held.
What is the Price-Earnings Ratio (P/E)?
Market Price per Share / Earnings per Share
Rule of thumb is 10–15 times for a “fair” valuation.
What does the DuPont Framework relate to?
Return on Equity = Profit Margin × Asset Turnover × Equity Multiplier
Influences profitability and efficiency.
What impact does liquidity and capital structure have on a company?
Affects cost of capital and solvency, influencing profitability
Market ratios reflect investor sentiment on these fundamentals.
Complete the statement: If Debt Ratio = 70%, then Equity Ratio = _______
0.30
This indicates the proportion of assets financed by equity.
What was JB Hi-Fi’s Current Ratio in 2021?
1.07 times
Below 1.5 but normal for retail; should compare with peers.
What was JB Hi-Fi’s Quick Ratio in 2021?
0.38 times
Typical in retail due to inventory cycle.
What does a significant drop in Cash Flow Ratio indicate?
Lower operating cash inflows
Example: JB Hi-Fi’s drop from 0.73 times to 0.14 times.
