AUD 3.07 - Financial Ratios

  1. What are the 4 liquidity ratios?
    • working capital
    • current ratio
    • acid-test ratio (quick test)
    • cash ratio
  2. What is the purpose of the liquidity ratios?
    Determine the entity's short-term ability to pay maturity obligations
  3. Working Capital
    current assets – current liabilities
  4. 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.
  5. Quick Ratio (aka Acid Test Ratio)
    (cash & cash equivalents) + marketable securities + AR / current liabilities
  6. Cash Ratio
    (cash & cash equivalents) + marketable securities / current liabilities
  7. 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
  8. What is the purpose of the activity ratios?
    Measure how effectively an enterprise is using its assets
  9. AR Turnover
    credit sales / avg AR
  10. AR Collection Period (aka Days Sales Outstanding)
    365 / AR Turnover
  11. Inventory Turnover
    COGS / avg inventory
  12. Inventory Conversion Period
    365 / inventory turnover
  13. Operating Cycle
    inventory conversion period + AR collection period
  14. Working Capital Turnover
    Sales / Avg Working Capital
  15. Total Asset turnover
    net sales / avg assets
  16. 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
  17. AP Deferral Period
    365 / AP Turnover
  18. 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
  19. What is the purpose of the profitability ratios?
    To measure the financial performance of an entity for a given period of time.
  20. Net Profit Margin
    net income / net sales
  21. ROA
    • net income / avg total assets, OR
    • net profit margin x asset turnover, OR
    • net income/net sales x net sales/avg total assets
  22. ROI (return on investment)
    [net income + (interest expense(1-tax rate)] / avg total LT liabilities & equity
  23. ROE (return on common equity)
    [net income - preferred dividends] / avg common equity
  24. Net operating margin percentage
    net operating income / net sales
  25. Gross (profit) margin percentage
    gross (profit) margin / net sales
  26. Operating cash flow per share
    Operating cash flow / common shares outstanding
  27. 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
  28. What is the purpose of investor ratios?
    Measures that are of interest to investors
  29. Degree of Financial Leverage
    EBIT / Earnings Before Taxes
  30. EPS (earnings per share)
    (net income - preferred dividends) / wt avg no. common shares outstanding
  31. P/E (price/earnings) Ratio
    market price per share / diluted earnings per share
  32. Dividend Payout Ratio
    Dividends per common share/diluted earnings per share
  33. Dividend Yield
    dividends per common share / market price per common share
  34. Book Value per Share
    (total stockholders' equity - preferred stock) / number of common shares outstanding
  35. 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
  36. 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
  37. Debt-to-equity ratio
    total debt / total common shareholders equity
  38. Debt Ratio
    total liabilities / total assets
  39. Times interest earned ratio
    EBIT / interest expense
  40. Operating Cash Flow / Total Debt
    operating cash flow / total debt.
Card Set
AUD 3.07 - Financial Ratios
Becker Review 2017