Study Session 8 Part 4

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ckcards33
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Study Session 8 Part 4
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2012-03-08 17:10:46
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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

    Measures trade credit

    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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