Study Session 8 Part 4

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1. Vertical common size balance sheet? Vertical common size Income Statement?
Vertically lined up, easy for comparisson. For balance sheet expresses as portion of Total Assets. For Income Statement Expresses as portion of Revenue.
2. Horizontal common size balance sheet? Horizontal common size Income Statement?
Both are relative to proportion of a base year's numbers.
3. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal ratio:

Receivable Turnover Ratio
Receiver Turnover Ratio = Annual Sales / Average Receivables

Measure of amount of receivables turnover

Ideal is to be with the industry

Activity Ratio
4. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:

Days of Sales Outstanding
365/Receivable Turnover Ratio(Annual Sales/Avg Turnover)

Measures number of days it takes company's customers to pay their bills

Want collection period clost to industry norm. If too high, customers are too slow paying meaning too much capital tied up in assets. Too low means firm's credit policy too rigorous.

Activity Ratio
5. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:

Inventory Turnover
COGS/Average Inventory

Measures efficiency with respect to goods sold.

Activit Ratio
6. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:

Day of inventory on hand
= 365/ Inventory turnover ratio(COGS/Avg Inventory)

Measures how many days of inventory are on hand

Want industry norm. If too low, will run out of supply. If too high, inventory could become obsolete

Activity Ratio
7. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:

Payable Ratio
=Purchases(End Inventory-beg inventory + COGS)/Average A/P

Activity Ratio
8. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:

Number of Days Payable
365/ Payable Ratio

Payable ratio ==Purchases(End Inventory-beg inventory + COGS)/Average A/P

Number of days to pay off company bills
9. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:

Total Asset Turnover
Revenue/Average Total Assets

Measures effectiveness of firm's use of its total assets to creat revenue.

Desirable to be industry norm. If too low, might mean company capital tied up in asset base. If too high, firm has too few assets for potential sales or asset base outdated.

Activity Ratio
10. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:

Fixed Asset Turnover
=Revenue/Average net Fixed Assets

Net fixed assets is net of accumulated depreciation.

Low fixed asset turnover mean capital tied up in asset base. Too high might imply firm has obsolete equip. IF equipment is new, ratio is Low.

Activity Ratio
11. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:

Working Capital Ratio
=Revenue/ Average Working Capital

=Workign Capital =(Current Assets - Current Liabilities)

Gives info about how much of reveneu is tied up in working capital. Firms have low working capital, if payables exceed inventory and receivbales In this case this ratio will be very large, and is less informative about changes in firms operating efficinecy.

Activity Ratio
12. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:

Current Ratio
= Current Assets/ Current Liabilities

Higher ratio means more likely able to pay off short term bills. Best known measure of liquidity. Current ratio of less than one means company has negative working capital which is Current Assets minus current liabilities.

Liquidity Ratio
13. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:

Quick Ratio
=Cash+Marketable securities+receivables/current liabilities

Higher this is more likely able to pay. More stringent than current ratio bc excludes inventories and other assets

Liquidity Ratio
14. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:
Cash Ratio
Most conservative betwee cash, quick and current ratio.

=cash+marketable securities/current liabilities

does not include other assets, inventory, or receivables.
15. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:

Defensive Interval Ratio
Cash+Marketable Securities+Receivables/Average daily expenditures

• indicates number of days of average cash expenditures firm could pay with current liquid assets. Expenditures include cash expenses for costs of goods, SG&A, and R&D. If taken from income statement, non cash charges like depreciation added back like indirect method.
• Liquidity
16. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:Cash Conversion Cycle
Lenght of time it takes to turn firm cash into inventory back to cash, in form of collection from sale of that inventory.

=Days sales outstanding+Days of inventory on hand-number of days fo payables

High is undesirable

Liquidity
17. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:

Debt to Equity
Total Debt/Shareholder Equity

Amt of reliance on debt financing. Total debt is calculated on different circumstances. Long-term debt plus interest -bearing short term debt is usual. Sometimes include present value of lease and/or noo interest bearing short term liabs, like accoutns payable.

Liquidity.
18. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state: Debt to Capital Ratio
Debt/ Total Capital

Capital equals all short term and long term debt plus preferred stock and equity
19. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:
Debt to Assets
Total Debt/Total Assets

Shows reliance on debt as source of financing
20. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state: Financial Leverage
Average total Assets/ Average total Equity

Average means value at begining and end divided by 2. Mroe debt financing increase this leverage.
21. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state: Interest Coverage
EBIT/Interest

How well firm can pay debt interest payments.

SOlvency
22. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state: Fixed Charge coverage
EBIT+Lease Payments/Interest+Lease Payments

Adding lease payments shows significant lease paymetns reduceds ratio drastically. Fixed charge coverage is more meraningful with companies that lease a large portio of assets, such as airlines.

Solvency
23. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state: Net Profit Margin
Net income/Revenue. Should not worry about below line items that wont affect company in future

Profitability ratio
24. Gross Profits
Operating Profit
Net Income
Total Capital 2 Ways
• Gross Profits - Sales-COGS
• Operating Profit = EBIT
• Net Income =Earnings after taxes before dividends
• Total Capital 2 Ways= Long term debt+Short term interst bearing debt+prefered stock+comon equity
• also:
• Total Assets
25. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state: Gross Profit Margin
Gross Profit (Sales-COGS)/Revenue

Profitablility
26. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:Operating Profit Margin
EBIT/Revenue or Operating Income/Revenue

does include non operating items such as gains on investments. Some formulas take them out, some do.

Profitablitiy
27. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:Pre tax margin
EBT/Revenue
28. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:ROA.
Net income/ Avg total assets. Also bc total assets includes debt and equity, the interest expense that was paid otu to investors without getting taxed should be added back to net income, but taxed. Therefore can also be Net income+((1-tax)(Interest Expense)/ Avg total assets
29. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:
Operating return on Assets
Operating Income/Average total assets or EBIT/Average total Assets
30. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state: Return on total capital
EBIT/AVG total capital. Analysts should be concerned if this ratio is too low.
31. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state:Return on Equity
Net Income/Average total equity
32. For Below Ratio, name which grouping of ratio it fits into, what the equation is, what it means, and what is ideal state: Return on common equity
• =Net Income-Prefered Dvidinds/Average Common Equity
• Shows return on equity to common stock shareholders.
33. Dupont Original Formula
ROE = (Financial Leverage)x(Asset Turnover)x(Net Profit Margin)

• Fin lev = Assets/Equity
• Asset Turnover = Revenue/Asset
• Net Profit Margin = Net Income/Revenue
34. Extended Dupont Equation
• ROE = (Financial Leverage)x(Asset Turnover)x(Interest Burden)x(Operating Margin)x(Tax burden)
• Fin lev = Assets/EquityAsset
• Turnover = Revenue/Asset
• Operating Margin = Operating Income/Revenue
• Interest Burden = EBT/EBIT
• Tax Burden = Net Income/EBT or 1-Tax Rate
35. Sustainable Growth Rate?Equation?
Proportion of a firm's net income retained to fund growth.

Equation is g=ROExRetention Rate

Retention Rate = Net Income to common Investors - Dividends/ Net income availabe to common

Retention rate also equals 1-Dividend payout ratio = 1-Dividends Declared/Net Income available to common

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 Author: ckcards33 ID: 139894 Filename: Study Session 8 Part 4 Updated: 2012-03-08 22:10:46 Tags: Study Session Part Folders: Description: Study Session 8 Part 4 Show Answers:

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