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BethG
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What are the 4 liquidity ratios?
 working capital
 current ratio
 acidtest ratio (quick test)
 cash ratio

What is the purpose of the liquidity ratios?
Determine the entity's shortterm ability to pay maturity obligations

Working Capital
current assets – current liabilities

Current Ratio: What is the formula and what does it mean assuming a ratio of 7.4:1?
 current assets / current liabilities
 For every $1 of liabilities, we have $7.4 of assets to pay it off.

Quick Ratio (aka Acid Test Ratio)
(cash & cash equivalents) + marketable securities + AR / current liabilities

Cash Ratio
(cash & cash equivalents) + marketable securities / current liabilities

What are the 9 activity ratios
 AR Turnover
 AR Turnover in Days
 Inventory Turnover
 Inventory Turnover in Days
 Operating Cycle
 Working Capital Turnover
 Total Asset Turnover
 AP Turnover
 Days in AP

What is the purpose of the activity ratios?
Measure how effectively an enterprise is using its assets

AR Turnover
credit sales / avg AR

AR Collection Period (aka Days Sales Outstanding)
365 / AR Turnover

Inventory Turnover
COGS / avg inventory

Inventory Conversion Period
365 / inventory turnover

Operating Cycle
inventory conversion period + AR collection period

Working Capital Turnover
Sales / Avg Working Capital

Total Asset turnover
net sales / avg assets

AP Turnover
 Cost of Sales / Avg AP
 Cost of Sales = Purchases made during the year + COGS
 Purchases made during the year = AP end of year  AP beginning of year

AP Deferral Period
365 / AP Turnover

What are the 8 profitability ratios
 Net Profit Margin
 ROA (Return on Total Assets (simple))
 ROA (Return on Total Assets (alternate))
 ROI (return on investment)
 Return on Common Equity
 Net Operating Margin Percentage
 Gross (profit) Margin Percentage
 Operating Cash Flow per Share

What is the purpose of the profitability ratios?
To measure the financial performance of an entity for a given period of time.

Net Profit Margin
net income / net sales

ROA
 net income / avg total assets, OR
 net profit margin x asset turnover, OR
 net income/net sales x net sales/avg total assets

ROI (return on investment)
[net income + (interest expense(1tax rate)] / avg total LT liabilities & equity

ROE (return on common equity)
[net income  preferred dividends] / avg common equity

Net operating margin percentage
net operating income / net sales

Gross (profit) margin percentage
gross (profit) margin / net sales

Operating cash flow per share
Operating cash flow / common shares outstanding

What are the 6 investor ratios
 Degree of Financial Leverage
 EPS (earnings per share)
 P/E (price/earnings ratio)
 Dividend Payout Ratio
 Dividend Yield
 Book Value per Share

What is the purpose of investor ratios?
Measures that are of interest to investors

Degree of Financial Leverage
EBIT / Earnings Before Taxes

EPS (earnings per share)
(net income  preferred dividends) / wt avg no. common shares outstanding

P/E (price/earnings) Ratio
market price per share / diluted earnings per share

Dividend Payout Ratio
Dividends per common share/diluted earnings per share

Dividend Yield
dividends per common share / market price per common share

Book Value per Share
(total stockholders' equity  preferred stock) / number of common shares outstanding

What are the 4 LongTerm Debt Paying Ability Ratios (aka Solvency ratios)
 Debt/Equity
 Debt Ratio
 Times Interest Earned
 Operating Cash Flow/Total Debt

What is the purpose of Longterm Debtpaying ability ratios (aka coverage ratios; solvency ratios)?
To measure the security on behalf of longterm creditors and investors

Debttoequity ratio
total debt / total common shareholders equity

Debt Ratio
total liabilities / total assets

Times interest earned ratio
EBIT / interest expense

Operating Cash Flow / Total Debt
operating cash flow / total debt.

