Chapter 3
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financial ratio
used to weigh and evaluate the operating performance of the firm and judge comparative performance

profitability ratio 3
 profit margin
 return on assets (investment)
 Return on equity

Asset utilization ratios 5
 receivable turnover
 average collection period
 inventory turnover
 fixed asset turnover
 total asset turnover


debt utilization ratios 3
 debt to total assets
 times interest earned
 fixed charge coverage

profitability ratio
purpose
 measure the ability of a firm to earn an adequate return on sales, total assets, and invested capital
 ability to effectively employ its resources

asset utilization ratios
 measure the speed at which a firm is turning overÂ receivables, inventory, and longerterm assets.
 how fast collecting, selling, generating sales

liquidity ratios
measures the firm's ability to pay off shortterm debt as they come due

debt utilization ratios
measures the overall debt position of the firm in light of its asset base and earning power

profit margin
equation
net income / sales

return on assets (investment)
equation
net income / total assets

return on equity
equation
net income / stockholder's equity

Du Pont system of analysis
 return on assets (investment) =
 profit margin * asset turnover
 profit margin = net income / sales
 asset turnover = sales / total assets

Du Pont formula
modified
 return on equity =
 return on assets (invest) * (1 debtÂ / assets)