Chap 5. Financial Ratios
Current ratio equation
Current assets / current liabilities
Average collection period (equation)
Days in the year / receivable turn over
Interest coverage (equation)
EBIT / Interest charges
Coverage Ratio type
Interest coverage
Acid-Test (measure)
Measures company's ability to convert current assets in cash in order to pay short term liabilities
Debt to Equity (measure)
Measures the proportion of borrowed caputal to invested capital
Net profit margin (equation)
Net profit after taxes / net sales
Acid test (definition)
Shows a firms ability to meet current liabilities with its most liquid current assets
Debt to Equity (definition)
Shows the extent to which the firm is financed by debt
Profitability Ratios (definition)
These ratios reflect the results of the company's profit seeking activities
Leverage ratios (types)
a. Debt to equity ratio b. debt ratio
Liquidity Ratios (types)
a. current ratios b. Acid test ratio c. Current assets to Total assets ratio
Profitability ratios (types)
a. gross profit magin b. net profit margin c. return on investment d. return on equity
Activity Ratio (types)
a. total assets turnover b. reveivable turnover c. average collevtion turnover
Acid-Test (equation)
current assets - inventories / current liabilities
Current assets to total assets (Equation)
current assets / total assets
Gross profit margin (equation)
gross profit / net sales
Receivable turnover (definition)
indicated the number of times average amount of receivables is collected and the efficiency in collection
Net profit margin (definition)
indicates the firm's profitability after taking account of all expenses and income taxes
Gross profit margin (definition)
indicates the gross margin per peso sales. used in determining the adequecy of gross margin to cover the operating expenses and provide desired profit
Current assets to total assets (definition)
indicates the liquidity of the total assets
Total asset turnover (definition)
indicates the overall effectiveness of the firm in utilizing its assets to generate sales
Return on equity (definition)
indicates the profitability to the shareholders of the firm (after all expenses and taxes)
Debt ratio (measure)
measure the ratio of comapny's totay assets financed by borrowed funds
Net profit margins (measure)
measures company;s net profitability after all business expenses
Return on equity (measure)
measures shareholders earning compared to shareholders equity
Current Ratios (measure)
measures the company's ability to pay short term liabilities
Return on investment (equation)
net profit after taxes / total assets
Return on equity (equation)
net profit after taxes /shareholder's equity
Total asset turnover (equation)
net sales / total assets
Activity Ratios (definition)
related to operations and operating efficiency beacuase they measure how quickly the firm is converting assets into cash
Liquidity Ratios (Definition)
the ability of assets to be converted quickly into cash
Leverage ratios (definition)
the responsibility of the financial manager to determine the level of debt that is appropriate for a firm
Debt to equity (equation)
total liabilities / Shareholders' Equity
Debt ratio (Equation)
total liabilities / total assets
Debt Ratio (Definition)
Indicates what portion of total assets is provided by creditors
Receivable turnover (equation)
Annual next credit sales / Receivables
Average collection period (definition)
Average number of days that receivables are outstanding
Return on investment (definition)
Indicates the profitability on the assets of the firm (after all expenses and taxes)
Coverage Ratios definition
Indicates a firms ability to cover interest charges