Terms in this set (36)

  • Standardization
    to gain insight when comparing companies & finances
  • Flexibility
    ratio analysis is not governed by GAAP; best analysts achieve the greatest benefits
  • Focus
    ratios allow for quick discover of area that need investigation
  • Liquidity
    ability to meet short-tem obligations
  • Current Ratio (liquidity)
    Current assets/current liabilities higher ratio= likelyhood of ability to meet short term obligations
  • Quick Ratio (liquidity)
    Current assets - inventory/current liabilities higher ratio= greater ability to meet short term obligations
  • Accounts Recievable Turnover (liquidity)
    Credit sales/AR ratio of 12= company collects entire AR 12 times per year
  • Average Collection Period/ACP (liquidity)
    365/AR turnover # indicates the number of times per year receivables are turned
  • Inventory Turnover (liquidity)
    COGS/Inventory # of times company turns it receivalbes in a year
  • Days on Hand/DOH (liquidity)
    365/Inventory Turnover how many days of inventory the company has on hand
  • Efficiency Ratios
    measure how effectively a company uses assets to generate sales or profit
  • Total Asset Turnover/TAT (efficiency)
    Sales/Total Assets how many dollars in sales generated per dollar of assets
  • Fixed Asset Turnover/FAT (efficiency)
    Sales/Fixed Assets sales generated per dollar of fixed assets
  • Operating Income Return on Investment/OIROI (efficiency)
    EBIT/Total Assets operating profit generated per dollar of assets
  • Financing Ratios
    describes what proportions the firm uses equity and/or debt to finance assets
  • Debt Ratio (financing)
    Total Liabilities/Total Assets measures the proportion of the firm's assets financed with debt
  • Interest-Bearing Debt to Total Capital/IBDTC (financing)
    Interest-Bearing debt/Interest-Bearing debt + owners' equity precise measure of a firm's finacial structure
  • Times Interest Earned Ratio/TIE (financing)
    EBIT/Interest Expense how many times a company can pay interest expense given operating profit
  • Financial Leverage Ratio/FLR (financing)
    Total Assets/Equity amount of debt financed with equity
  • Profitability Ratios
    profit from sales or investment
  • Return on Assest/ROA (profit-investment)
    Net Income/Total Assets earnings as a % of the capital invested
  • Return of Equity/ROE (profit-investment)
    Net Income/Owners' Equity earnings as a % of each dollar invested
  • Gross Margin (profit-sales)
    Gross Profit/Sales % of revenue remaining after COGS
  • Operating Margin (profit-sales)
    EBIT/Sales % of sales remaining after COGS
  • Net Margin (profit-sales)
    Net Income/Sales % of revenue for equity holders after all costs are covered
  • DuPont Equation
    ROE= Net Income/Sales x Sales/Total Assets x Assets/Equity = Net Margin x TAT x FLR
  • Three tools for ROE
    1. Higher Margins- decrease cost relative to sales (higher net margin) 2. Greater Efficiency- increase sales relative to assets (higher TAT) 3. Lever up- increase debt relative to equity (higher FLR)
  • Trend Analysis
    examines firm's ratios over time (back 5 yrs, forcasting 3 yrs)
  • Cross-sectional analysis
    comparing a firm's ratios to a peer group
  • Internal Goal Monitoring
    ratios can measure progress relative to specific goal set within the company
  • Common pitfall for analysts
    1. Timing issues- mixing data from income statement & balance sheet 2. Accounting issues- understanding accounting choices before assuming their ratios are comparable
  • External risk with ratios
    changes in macro-economic cycle, competitive forces, the technological environment & demographic/societal changes
  • Interal risk with ratios
    financial viability & flexibility of the firm, willingness to continually innovate, the attitude towards compliance with laws and controll, and company culture
  • Legalities with ratios
    firms will have to operate within prevailing legal constraints
  • Social resonsibility with ratios
    employee relations, human capital development, strong communities and schools & environmental issues all provide value maximization for a firm's social stewardship
  • Scrubbing data
    making financial statements comparable to peer firms by: matching fiscal year ends (recast) & reconcil accounting difference