AUD 3.07 - Financial Ratios

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What are the 4 liquidity ratios?
- working capital
- current ratio
- acid-test ratio (quick test)
- cash ratio
What is the purpose of the liquidity ratios?

Determine the entity's short-term ability to pay maturity obligations
Working Capital

current assets – current liabilities
Current Ratio: What is the formula and what does it mean assuming a ratio of 7.4:1?
- current assets / current liabilities
- For every $1 of liabilities, we have $7.4 of assets to pay it off.
Quick Ratio (aka Acid Test Ratio)

(cash & cash equivalents) + marketable securities + AR / current liabilities
Cash Ratio

(cash & cash equivalents) + marketable securities / current liabilities
What are the 9 activity ratios
- AR Turnover
- AR Turnover in Days
- Inventory Turnover
- Inventory Turnover in Days
- Operating Cycle
- Working Capital Turnover
- Total Asset Turnover
- AP Turnover
- Days in AP
What is the purpose of the activity ratios?

Measure how effectively an enterprise is using its assets
AR Turnover

credit sales / avg AR
AR Collection Period (aka Days Sales Outstanding)

365 / AR Turnover
Inventory Turnover

COGS / avg inventory
Inventory Conversion Period

365 / inventory turnover
Operating Cycle

inventory conversion period + AR collection period
Working Capital Turnover

Sales / Avg Working Capital
Total Asset turnover

net sales / avg assets
AP Turnover
- Cost of Sales / Avg AP
- Cost of Sales = Purchases made during the year + COGS
- Purchases made during the year = AP end of year - AP beginning of year
AP Deferral Period

365 / AP Turnover
What are the 8 profitability ratios
- Net Profit Margin
- ROA (Return on Total Assets (simple))
- ROA (Return on Total Assets (alternate))
- ROI (return on investment)
- Return on Common Equity
- Net Operating Margin Percentage
- Gross (profit) Margin Percentage
- Operating Cash Flow per Share
What is the purpose of the profitability ratios?

To measure the financial performance of an entity for a given period of time.
Net Profit Margin

net income / net sales
ROA
- net income / avg total assets, OR
- net profit margin x asset turnover, OR
- net income/net sales x net sales/avg total assets
ROI (return on investment)

[net income + (interest expense(1-tax rate)] / avg total LT liabilities & equity
ROE (return on common equity)

[net income - preferred dividends] / avg common equity
Net operating margin percentage

net operating income / net sales
Gross (profit) margin percentage

gross (profit) margin / net sales
Operating cash flow per share

Operating cash flow / common shares outstanding
What are the 6 investor ratios
- Degree of Financial Leverage
- EPS (earnings per share)
- P/E (price/earnings ratio)
- Dividend Payout Ratio
- Dividend Yield
- Book Value per Share
What is the purpose of investor ratios?

Measures that are of interest to investors
Degree of Financial Leverage

EBIT / Earnings Before Taxes
EPS (earnings per share)

(net income - preferred dividends) / wt avg no. common shares outstanding
P/E (price/earnings) Ratio

market price per share / diluted earnings per share
Dividend Payout Ratio

Dividends per common share/diluted earnings per share
Dividend Yield

dividends per common share / market price per common share
Book Value per Share

(total stockholders' equity - preferred stock) / number of common shares outstanding
What are the 4 Long-Term Debt Paying Ability Ratios (aka Solvency ratios)
- Debt/Equity
- Debt Ratio
- Times Interest Earned
- Operating Cash Flow/Total Debt
What is the purpose of Long-term Debt-paying ability ratios (aka coverage ratios; solvency ratios)?

To measure the security on behalf of long-term creditors and investors
Debt-to-equity ratio

total debt / total common shareholders equity
Debt Ratio

total liabilities / total assets
Times interest earned ratio

EBIT / interest expense
Operating Cash Flow / Total Debt

operating cash flow / total debt.

Author

BethM

332509

Card Set

AUD 3.07 - Financial Ratios

Description

Becker Review 2017

Updated

2017-07-11T03:55:48Z

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