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Chapter 2: Ratios
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Terms in this set (10)
profitability ratios
measure the income or operating success of a company for a given period of time
liquidity ratios
measure short term ability to pay meet maturing obligations and unexpected needs for cash
solvency ratios
measure the ability of the company to survive over a long period of time
earnings per share
measures (profitability)the net income earned on each share of common stock. determines return on investment. a higher amount suggests improved performance. values should not be compared between companies.
eps formula
divide earnings available to common stock holders (net income-preferred stock dividends) by the average number of common shares outstanding during the year.
working capital
measures liquidity. it is the difference between current assets and current liabilities. when assets > liabilities it is positive and there is a greater chance the company will pay its liabilities and vice versa.
current ratio
measures liquidity. divide current assets by current liabilities. more reliable than working capital. example: .#:1 means that for every $1 of current liabilities, it has # cents of current assets. the weakness of the ratio is that it doesn't take into account the composition of current assets. a company can use cash to pay off current liabilities to appear more liquid.
solvency
Long-term creditors and stockholders are interested in the company's ability to pay interest as it comes due and to repay the balance of a debt due at its maturity
debt to total assets ratio
concerns long-term debt-paying ability. total (long term and short term) liabilities divided by total assets. measures the percentage of total financing provided by creditors rather than stockholders. Debt financing is more risky than equity financing because debt must be repaid at specific points in time, whether the company is performing well or not. The higher the percentage of debt financing, the riskier the company. ratio of #% means that every 1 dollar of assets was financed by # cents of debt.
debt financing
more risky than equity financing because debt must be repaid at specific points in time, whether the company is performing well or not. Thus, the higher the percentage of debt financing, the riskier the company.
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