MGT Chapter 8

ratio analysis

A series of ratios along four areas of company performance (liquidity, activity, leverage, profitability) that provides a picture of the health of the company.

deviation analysis

Analysis of the differences between the predicted and the actual performance.

leverage ratios

Ratios that are used to examine the relative level of indebtedness of the entrepreneurial business. Debt-to-Equity: portions owned by lenders vs founders Debt-to-Assets: Assets owned by creditors Times Interest Earned: how many times it could repay the interest on its debt

profitability ratios

Ratios that examine the performance of the firm and its ability to make economic rents over and above its costs. Gross Profit Margin: Gross Profit divided by Net Sales. This ratio is used to determine the overall profit that is obtained from all sales during the period being evaluated Operating Profit Margin: finer-grained measure, this looks at the gross profit minus all of the operating expenses Net Profit Margin:bottom line calculation from the income statement Return on Assets (ROA): This ratio examines the ability of the firm to return an overall profit compared to the amount of assets that the firm has invested into the effort. Return on Equity (ROE): This ratio is used to provide all investors with an evaluation of how much each dollar of their investment is generating in profit.

activity ratios

Ratios that measure the efficiency with which the entrepreneur is handling the resources of the business. Inventory Turnover: Cost of Goods Sold divided by Inventory Account Receivable Turnover: Credit Sales divided by Accounts Receivable. This metric examines how fast the company turns credit sales into cash Total/Fixed Asset Turnover:examine the ability to generate sales from the assets employed by the organization

liquidity ratios

Ratios that measure the short-term ability of the firm to meet its obligations. Current Ratio: Current Assets divided by Current Liabilities. Quick (Acid) Ratio: Current Assets minus Inventory divided by Current Liabilities