subtracts inventory from current assets since less liquid and inventory could be damaged
define cash ratio
cash/current liabilities
who interested in cash ratio
very short term creditor
what are the short term solvency ratios
1. current ratio
2. quick ratio
3. cash ratio
define total debt ratio
(total assets - total equity)/total assets
Groups of financial ratios
1. Short-term solvency or liquidity ratios
2. Long-term solvency or ﬁnancial leverage ratios
3. Asset management or turnover ratios
4. Proﬁtability ratios
5. Market value ratios
What total debt ration tells you
$ of debt per $ of assets
Define debt - equity ratio
Total debt/total equity
Define equity multiplier
Total assets/total equity
or 1 + Debt-equity ratio
Define Times Interest Earned
EBIT/Interest
What does Times Interest Earned mean
measures how well a company has its interest obligations covered, and it is often called the interest coverage ratio
Define Cash coverage ratio
EBITDA/Interest
What does Cash coverage ratio mean
It is a basic measure of the ﬁrm’s ability to generate cash from operations, and it is frequently used as a measure of cash ﬂow available to meet ﬁnancial obligations
What are the Long-term solvency or ﬁnancial leverage ratios
1. Total debt ratio
2. Debt-equity ratio
3. Equity multiplier
4. Times interest earned
5. Cash coverage
6. Unnamed ratio with EBITDA
Unnamed long term solvency ratio
Interest bearing debt/EBITDA
Define inventory turnover
COGS/inventory
Days' sales in inventory
365 days/inventory turnover ratio
Total Asset Turnover
Sales/Total Assets
Define Return on Assets
Net Income/Total Assets
Define Return on Equity
Net Income/Total Equity
Asset Management or Turnover Measures
1. Inventory Turnover
2. Days’ Sales in Inventory
3. Receivables Turnover
4. Days’ Sales in Receivables
5. Total Asset Turnover
Define Profit Margin
Net Income/Sales
EBITDA Margin
EBITDA/Sales
Return on Assets
Net Income/Total Assets
Return on equity
Net income/Total equity
Profitability measures
1. Profit Margin
2. EBITDA Margin
3. Return on Assets
4. Return on Equity
Earnings Per Share
Net Income/Shares outstanding
Price-Earnings Ratio
Price per share/Earnings per share
Market-to-Book ratio
Market value per share/book value per share
Market capitalization
Price per share x shares outstanding
Enterprise Value
Market capitalization + market value of interest bearing debt - cash
Enterprise value multiples
EV/EBITDA
Market Value Ratios
1. Price-earnings ratio
2. Market-to-book ratio
3. Enterprise Value multiple
Du Pont identity
ROE = PM x TATO x EM
ROE = NI/Sales x Sales/Total assets x Total assets/total equity
The Du Pont identity tells us that ROE is affected by three things
1. Operating efﬁciency (as measured by proﬁt margin)
2. Asset use efﬁciency (as measured by total asset turnover)
3. Financial leverage (as measured by the equity multiplier)
Dividend payout ratio
Cash dividends/Net income
retention ratio or plow back ratio
Addition to retained earnings/Net income
or 1 - dividend payout ratio
capital intensity ratio
total assets/sales for the year just ended
External financing need
(Assets/sales) x change in sales - (spontaneous liabilities/sales) x change in sales - PM