Financial Ratios
Asset Turnover Ratio
* Asset turnover is the ratio of total sales or revenue to average assets. * This metric helps investors understand how effectively companies are using their assets to generate sales. * Investors use the asset turnover ratio to compare similar companies in the same sector or group. * A company's asset turnover ratio can be impacted by large asset sales as well as significant asset purchases in a given year.
Inventory ratio turnover
* Inventory turnover shows how many times a company has sold and replaced inventory during a given period. * This helps businesses make better decisions on pricing, manufacturing, marketing, and purchasing new inventory. * A low turnover implies weak sales and possibly excess inventory, while a high ratio implies either strong sales or insufficient inventory.
Profit Margin Ratio
* Profit margin conveys the relative profitability of a firm or business activity by accounting for the costs involved in producing and selling goods. * Margins can be computed from gross profit, operating profit, or net profit. * The greater the profit margin, the better, but a high gross margin along with a small net margin may indicate something that needs further investigation.
Return on Assets
* Return on Assets (ROA) is an indicator of how well a company utilizes its assets, by determining how profitable a company is relative to its total assets. * ROA is best used when comparing similar companies or comparing a company to its previous performance. * ROA takes into account a company's debt, unlike other metrics, such as Return on Equity (ROE)
Return on Equity
* Return on equity (ROE) measures how effectively management is using a company's assets to create profits. * Whether an ROE is considered satisfactory will depend on what is normal for the industry or company peers. * As a shortcut, investors can consider an ROE near the long-term average of the S&P 500 (14%) as an acceptable ratio and anything less than 10% as poor.
Current ratio
* The current ratio compares all of a company's current assets to its current liabilities. These are usually defined as assets that are cash or will be turned into cash in a year or less, and liabilities that will be paid in a year or less. * The current ratio is sometimes referred to as the "working capital" ratio and helps investors understand more about a company's ability to cover its short-term debt with its current assets. * Weaknesses of the current ratio include the difficulty of comparing the measure across industry groups, overgeneralization of the specific asset and liability balances, and the lack of trending information.
assets formula
Assets = Liabilities + Equity ; +- = -+ & -+
ROE formula
Net Income/Equity
Profit Margin ratio formula
Net Income/Net Sales Revenue
ROE ratio formula
Net Income/Shareholder's Equity
ROA formula
Net Income/Total Assets
ROA ratio formula
Net Income/Total Assets
asset turnover ratio formula
Net Sales Revenue / Average Total Assets
financing cash flow
Related to external sources of financing--issuing stock or bonds, retiring stock or bonds; payment of dividends and settling of bonds payable
what are example assets
cash, accounts receivable, inventory, land , property, plant , and equipment
list all assets accounts
cash; accounts receivable; inventories (raw materials, work in process, and merchandise), prepaid insurances, land, buildings and equipment, and accumulated depreciation
list all shareholder's equity accounts
common stock; paid in capital ; retained earnings; sales revenue, cost of goods sold, salary expenses, insurance expenses, depreciation expenses, income tax expenses
if have more accounts receivable
have less cash so subtract; because people owe you money you have less cash
if have decrease in accounts receivable
have more cash than would have otherwise so add; because people owe you money you have less cash
contributed capital
how much capital the shareholders have invested
liabilities
how much the company owes
retained earnings or net income
how the company performed
revenues _____ retained earnings
increase
revenues
increase retained earnings; are typically cash or claims to cash that are earned thorugh the selling of goods or services
gains
inflows of assets that are not generated through the ordinary course of business
where should proceeds go for cash flow
investing
what of central formula is income taxes payable
liabilites
what of central formula is accoutns payable
liabilities
what of central formula is bonds payable
liabilities
payable means
liability
what of central formula is a loan
liability
what of central formula is accounts payable
liability
cash from operation activities formula
net income + depreciation expense - increase in accounts receivable - decrease in accounts payable - the gain of sale + decrease in accounts receivable
where should gains and losses go for cash flow
operations
losses
outflows of assets that are not generated through the ordinary course of business
dividends
payments of cash from a corporation to its stockholders; type of retained earnings
operating cash flow
primary business activities--selling goods or rendering services; interest income, dividends received
cash from investing activities formula
proceeds from sale - purchases of equipment
what does P&L stand for
profit and loss
net income formula
revenues - expenses + gains - losses
Net income formula
sales - expenses
Asset Turnover ratio formula
sales revenues / total assets
expenses are
shareholders equity
what of central formula is common stock
shareholders equity
what of central formula is cost of goods sold
shareholders equity
what of central formula is depreciation expenses
shareholders equity
what of central formula is income tax expenses
shareholders equity
what of central formula is insurance expenses
shareholders equity
what of central formula is paid in capital
shareholders equity
what of central formula is retained earnings
shareholders equity
what of central formula is salary expenses
shareholders equity
what of central formula is sales revenue
shareholders equity
what of central formula contributed capital
stockholder's equity
what of central formula retained earnings
stockholders equity
who are the firm's stakeholders
stokeholders; creditors; suppliers; employees; customers; IRS, competitors
cash flow statement
the statement sums to the actual change in cash and cash equivalents during the year; operating, investing, and financing
accumulated depreciation
the total amount of depreciation expense that has been recorded since the purchase of a plant asset; is credit on asset and debit on shareholders equity for Retained Earnings Expenses
assets
what a company owns; anything of value owned by a business
if have less accounts payable
you have less cash ; lesss money to give out
Debt to equity ratio
* The debt-to-equity (D/E) ratio compares a company's total liabilities to its shareholder equity and can be used to evaluate how much leverage a company is using. * Higher leverage ratios tend to indicate a company or stock with higher risk to shareholders. * However, the D/E ratio is difficult to compare across industry groups where ideal amounts of debt will vary. * Investors will often modify the D/E ratio to focus on long-term debt only because the risk of long-term liabilities are different than for short-term debt and payables.
Activity Financial Ratios
*Asset Turnover *Days Receivable *Inventory Turnover
Leverage Financial Ratios
*Current Ratio *Debt-to-Equity
Profitability Financial Ratios
*ROA *ROE *Profit Margin
Debit credit for assets
+ / -
debit credit for equity
- / +
debit credit for liabilities
- / +
Days Receivables ratio formula
Accounts receivable / (Sales / 365)
Liabilities
Amounts owed to creditors/ what a company owns
accounts payable
Amounts to be paid in the future for goods or services already acquired; money owed by a company to its creditors ; is a liability
Accounts Receivable
Amounts to be received in the future due to the sale of goods or services
accounts receivable
Amounts to be received in the future due to the sale of goods or services; total amount of money owed to a business ; is an asset
retained earnings
An amount earned by a corporation and not yet distributed to stockholders. They represent returns on total stockholders' equity reinvested back into the company. --> can be revenue, dividends, and expense. Part of shareholders equity. Increased by revenue and decreased by expenses
revenue
An increase in owner's equity resulting from the operation of a business; retained earnings
Inventory ratio turnover formula
Cost of Sales/ Inventory
expenses
The cost of assets consumed or services used in the process of generating revenues; type of retained earnings. They decrease retained earnings. Are outflows of cash or claims to cash that are incurred to generate reveneues
Stockholders' Equity
The owners' claim to assets in a coropration
operating cash flows
Those cash flows that arise from normal operations; the difference between cash collections and cash expenses associated with the manufacture and sale of inventory.
dividend payable
a current liability resulting from a corporation's directors declaring a cash dividend.
what is accounting
accounting is the process of conveying information to the firm's stakeholders
list all liabilities accounts
accounts payable, income taxes payable; bonds payable
days of receivables ratio formula
accounts receivable / (revenue*days)
investing cash flow
acquiring and selling productive assets-- acquisition and disposal of PPE ; purchase/sale of securitites: other firms' stock or bonds
depreciation expense
alwasy add it back to net income for cash flow
types of RE
are all in shareholders equity: revenue, dividends, expenses
what of central formula are property, plant, and equipments
asset
what of central formula is accounts receivable
asset
what of central formula is cash
asset
what of central formula is inventory
asset
what of central formula is land
asset
what of central formula is accumulated depreciation
assets
what of central formula is buildings and eqipment
assets
what of central formula is inventories
assets
what of central formula is is land
assets
what of central formula is prepaid insurances
assets
what of central formula is merchandise
assets; inventories
what of central formula is raw materials
assets; inventories
what of central formula is work in process
assets; inventories
Ending retained earnings formula
beginning retained earnings + net income - dividends
investing cash flows
cash transactions involving purchase and sale of long-term assets
Inventory turnover ratio formula
cost of goods sold/average inventory
Current Ratio formula
current assets / current liabilities
current ratio formula
current assets / current liabilities
expenses ______ retained earnings
decrease
central formula
total assets = total liabilities + total stockholders equity
debt-to-equity ratio ratio formula
total liabilities / equity
leverage ratio formula
total liabilities / total assets
Debt-to-equity ratio formula
total liabilities/shareholders equity