Chapter 3
quick ratio =
(Current Assets - Inventory) / Current Liabilities
What is the formula for computing a firm's sustainable growth rate?
(ROE x b)/(1 - ROE x b)
a current ratio lower than x would be unusual for a firm
1
are the prime source of information about a firm's financial health.
Financial statements
Which of the following is true about the sustainable growth rate?
It is the maximum rate of growth a firm can maintain without increasing its financial leverage.
The DuPont identity tells us that ROE is affected by three things:
Operating efficiency (as measured by profit margin). Asset use efficiency (as measured by total asset turnover). Financial leverage (as measured by the equity multiplier).
sum up the quick ratio
The higher the ratio result, the better a company's liquidity and financial health; the lower the ratio, the more likely the company will struggle with paying debts.
this ratio measures how well a company has its interest obligations covered
Times Interest Earned ratio
A higher CCR (typically above 1.0x) is better than a lower CCR as it indicates
a business is able to convert a majority of its earnings into cash
ROE needs to be higher because
a high return on equity ratio because this indicates that the company is using its investors' funds effectively.
The higher the ROA number, the
better, because the company is earning more money on less investment
A very short-term creditor might be interested in the
cash ratio
One very common and useful way of doing this is to work with percentages instead of total dollars. The resulting financial statements are called
common size statements
To a creditor, particularly a short-term creditor such as a supplier, the higher
current ratio the better
One of the best-known and most widely used ratios is the
current ratios
The retention ratio equals one minus the
dividends payouts
EBITD =
earnings before interest, taxes, and depreciation—say "ebbit-dee")
Having a higher current ratio for a firm is good all the time true/fasle
false
A higher times interest earned ratio is
favorable because it means that the company presents less of a risk to investors and creditors in terms of solvency.
Another way of avoiding the problems involved in comparing companies of different sizes is to calculate and compare
finical ratios
Given an internal growth rate of 3 percent, a firm can
grow by 3 percent or less without any additional external financing
rec turnover ratio is good when it is
high
Price Earning ratio measures
how much investors are willing to pay per dollar of current earnings, higher PEs are often taken to mean that the firm has significant prospects for future growth.
If a company has inventory, the quick ratio will always be blank than the current ratio
less
As the name suggests, short-term solvency ratios as a group are intended to provide information about a firm's liquidity, and these ratios are sometimes called
liquidity measures
the higher this ratio for inventory ratio means
more efficiently we are managing inventory.
A firm may use a price-sales ratio when it has had postiveBlank 1Blank 1 postive , Incorrect Unavailable (negative/positive) earnings over the past year.
negative
When comparing statements in the common balance sheet we use
percentages
If a company has had negative earnings for several periods they might choose to use a
price sales ratio
DuPoint Equation for ROE
profit margin * total asset ratio * equity muiltplyer
a measure of profit per dollar of assets
return on assets
a measure of how the stockholders fared during the year
return on equity
On the income statement comparing percentages we divide everything/x
sales
More to the point, relatively large inventories are often a sign
short term trouble
liquidity ratios are particularly interesting to
short-term creditors
profit margin tells us
tells you how much money you generate in profit with each sale
higher the profit margin
the better
If we express dividends paid as a percentage of net income, the result
the dividend payout ratio
On the common-size balance sheet we divide the assets/x and libilites/x
total assets and total liabilities
takes into account all debts of all maturities to all creditors
total debt ratio
low current ratio may not be a bad sign for a company with a large reserve of
untapped borrowing money
In general on the common size balance sheet we want our current assets to go blank and out current libailies to go blank
up and down
a high cash ratio indicates
you can pay off debt easy
current ratio =
Current Assets / Current Liabilities (CA/CL)