Internal Liquidity (Solvency) Ratios
they measure the ability of a firm to meet its short-term obligations
Current Ratio
solvency ratio - AKA "liquidity ratio," cash asset ratio," "cash ratio" - current ratio = current asssets/current liabilities
Quick Ratio
solvency ratio - measures a companies ability to meet its short-term obligations with its most liquid assets - quick ratio = (current assets - inventories)/current liabilities
Cash Ratio
solvency ratio - can determine if, and how quickly, the company can repay its short-term debt - cash ratio = (cash & cash equivalents)/current liabilities
Receivables Turnover Ratio
solvency ratio - used to measure a firm's effectiveness in extending credit as well as collecting debts - is an activity ratio, measures how efficiently a firm uses its assets - receivables turnover ratio = net credit sales/average accounts receivable
Inventory Turnover Ratio
solvency ratio - showing how many times a companies inventory is sold and replaced over a period - the days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand (inventory turnove
Cash Conversion Cycle
solvency measure - expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows - cash conversion cycle = days inventory outstanding + days sales outstanding - days payable outstanding
Operating Effeciency Ratios
they examine how the manaegment uses its assets and capital, measured by dollars of sales generated by various assets or capital categories
Total Asset Turnover Ratio
operating effeciency ratio - measures company's ability to generate sales from its assets (i.e. how effeciently a company can use its assets to generate sales) - asset turnover ratio = net sales/average total assets
Net Fixed Asset Turnover Ratio
operating effeciency ratio - measures a company's ability to generate sales from its net fixed assets (i.e. property, plant, and equipment - net of depreciation) - fixed asset turnover = net sales/net property, plant, and equipment
Equity Turnover Ratio
operating effeciency ratio - measures a company's ability to generate sales givin its investment in total equity (i.e. common shareholders and preferred stockholders) - equity turnover ratio = net sales/average total equity
Operating Profitability Ratios
they analyze profits as a percentage of sales and as a percentage of the assets and capital employed
Gross Profit Margin
operating profitability ratio - used to assess a firm's financial health - serves as the source for paying additional expenses and future savings - gross profit margin = (revenue - COGS)/revenue
Operating Profit Margin
operating profitability ratio - used to measure a company's pricing strategy and operating efficiency - operating margin = operating income/net sales
Net Profit Margin
operating profitability ratio - measures how much out of every dollar of sales a company actually keeps in earnings - net profit margin = net income/revenue
Common Size Income Statement
an income statement in which each account is expressed as a percentage of the value of sales - can be used to alow for easy analysis between companies or between time periods of a company
Return on Total Invested Capital (ROIC)
used to assess a company's effeciency at allocating the capital under its control to profitable investments - gives a sense of how well a company is using its money to generate returns - often compared to WACC - return on invested capital = (net income -
Return on Owner's Equity (ROE)
measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested - ROE = net income/shareholder's equity
The DuPont System
assets are measured at their gross book value rather than at net book value in order to produce a higher return on equity - ROE is affected by 3 things: (1) operating effeciency; (2) asset use effeciency; and (3) financial leverage - ROE = profit margin(p
Extended DuPont System
expansion of the DuPont formula to provide more information - ROE = [EBIT/sales
sales/total assets - interest/total assets]
total assets/equity * [(1 - tax)/net before tax]
Business Risk
uncertainty of operating income caused by the firm's industry - measured by the variability of the firm's operating income over time - two factors contributing to the variability of operating earnings are: (1) sales variability; and (2) operating leverage
Financial Risk
additional uncertainty of returns to equity holders due to a firm's use of fixed obligation debt securities
Financial Ratios
measure financial risk - three categories: (1) proportion of debt (balance sheet) ratios; (2) earnings or cash flow coverage ratios; and (3) cash flow ratios
Debt-Equity Ratio
a measure of a company's financial leverage - D/E = total liabilities/sharehlolder's equity
Long-Term Debt to Total Capital Ratio
shows financial leverage of the firm - LTD/TC ratio = long term debt/(long term debt + preferred stock + common stock)
Total Debt Ratios
measures the extent of a company's or consumer's leverage - interpreted as the proportion of a company's assets that are financed by debt - debt ratio = total debt/total assets
Interest Coverage Ratio
used to determine how easily a company can pay interest on outstanding debt - interest coverage ratio = EBIT/interest expense
Cash-Flow Coverage Ratio
indicates the ability of a company to pay interest and principal amounts when they become due - important indicator of liquidity position of a company - cash-flow coverage ratio = operating cash flows/total debt
Cash-Flow-Long-Term Debt Ratio
measures how much cash is available to pay for long-term debt - is a good indicator of potential bankruptcy - CF to LTD ratio = cash flow/long-term debt (book value)
External Market Liquidity Risk
refers to the ability to buy or sell an asset quickly with little price change from prior transactions assuming no new information
Determinants of Growth
the amount of resources retained and renvested in the entity and the rate of return earned on resources retained (RR x ROE)
The Quality of the Balance Sheet
a high-quality balance sheet typically has a conservative use of debt or leverage
The Quality of the Income Statement
a high-quality income statement has earnings closer to cash
Footnotes
the purpose of footnotes is to provide information on how the firm handles balance sheet and income items - reading them is important