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40 terms

Chapter 3: Analyzing Financial Statements

STUDY
PLAY
ratio analysis
the process of calculating and analyzing financial ratios to assess the firm's performance and to identify actions needed to improve firm performance
liquidity ratios
measure the relation between a firm's liquid (or current) assets and its current liabilities
asset management ratios
measure how efficiently a firm uses its assets (inventory, accounts receivable, and fixed assets) as well as its accounts payable
current ratio
measures the dollars of current assets available to pay each dollar of current liabilities
quick ratios (acid-test)
measures a firm's ability to pay off short-term obligations without relying on inventory sales
cash ratio
measures a firm's ability to pay short-term obligations with its available cash and marketable securities
inventory turnover ratio
measures the number of dollars of sales produced per dollar of inventory
days' sales in inventory ratio
measure the number of days that inventory is held before the final product is sold
average collection period (ACP)
measures the number of days accounts receivable are held before the firm collects cash from the sale
accounts receivable turnover ratio
measures the number of dollars of sales produced per dollar of accounts receivable
average payment period (APP)
measures the number of days that the firm holds accounts payable before it has to extend cash to buy raw materials
accounts payable turnover ratio
measures the dollar cost of goods sold per dollar of accounts payable
fixed asset turnover ratio
measures the number of dollars of sales produced per dollar of fixed assets
sales to working capital ratio
measure the number of dollars of sales produced per dollar of net working capital
total asset turnover ratio
measures the number of dollars of sales produced per dollar of total assets
capital intensity ratio
measure the dollars of total assets needed to produce a dollar of sales
debt management ratios
measure the extent to which the firm uses debt (or financial leverage) versus equity to finance its assets
debt ratio
measure the percentage of total assets financed with debt
debt-to-equity ratio
measures the dollars of debt financing used for every dollar of equity financing
equity multiplier ratio
measures the dollars of assets on the balance sheet for every dollar of equity financing
capital structure
amount of debt versus equity to hold on the balance sheet
times interest earned ratio
measures the number of dollars of operating earnings available to meet each dollar of interest obligations on the firm's debt
fixed-charge coverage ratio
measures the number of dollars of operating earnings available to meet the firm's interest dollars and other fixed charges
cash coverage ratio
measure the number of dollars of operating cash available to meet each dollar of interest and other fixed charges that the firm owes
profitability ratios
show the combined effects of liquidity, asset management, and debt management on the overall operating results of the firm
profit margin
the percentage of sales left after all firm expenses are paid
basic earnings power ratio
measures the operating return on the firm's assets, irrespective of financial leverage and taxes
return on assets (ROA)
measures the overall return on the firm's assets, inclusive of financial leverage and taxes
return on equity (ROE)
measures the return on the common stockholder's investment in the assets of the firm
dividend payout ratio
the percentage of net income available to common stockholders that the firm actually pays as cash to these investors
market value ratios
relate a firm's stock price to its earnings and its book value
market-to-book ratio
measures the amount that investors will pay for the firm's stock per dollar of equity used to finance the firm's assets
book value per share
accounting based number reflecting the firm's assets' historical costs and value
price-earnings ratio
measures how much investors are willing to pay for each dollar the firm earns per share of its stock
DuPont analysis system
an analytical method that used the balance sheet and income statement to break the ROA and ROE ratios into component pieces
common-size financial statements
dividing all balance sheet amounts by total assets and all income statement amounts by net sales
internal growth rate
the growth rate a firm can sustain if it uses only internal financing (retained earnings) to finance future growth
substantial growth rate
the growth rate a firm can sustain if it finances growth using both debt and internal financing such that the debt ration remains constant
time series analysis
analyzing firm performance by monitoring ratio trends
cross-sectional analysis
analyzing the performance of a firm against one or more companies in the same industry