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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.
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Author
BethM
ID
332509
Card Set
AUD 3.07 - Financial Ratios
Description
Becker Review 2017
Updated
2017-07-11T03:55:48Z
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