Chapter 3 - Ratio Analysis

1. Current Ratio 2. Quick Ratio 3. Cash Ratio

3 types of liquidity ratios discussed?

Significant prospects for growth

A high Price-Earning ratio (PE ratio) is often taken to mean that the firm has what?

high

All other things being equal, a relatively ____________ (high/low) EBITDA margin is desirable.

Less than

For the Market-to-Book ratio, a value __________________ (less than, equal to, greater than) 1 could mean that the firm has not been successful overall in creating value for its stockholders

Use credit sales, if given. If its not given, then use total sales.

For the Receivables Turnover ratio and the Days' sales in Receivables ratio, what "sales" do you use?

Stock price per share X Number of shares outstanding

Formula for Market Cap?

1. Total Debt Ratio 2. Debt-Equity Ratio 3. Equity Multiplier

Given any on of these three ratios, you can immediately calculate the other two, because they all say exactly the same thing.

Dupont Analysis

Is a decomposition of ROE

1

It is not unusual for Total Asset Turnover is be less than ________, especially if a firm has a large amount of fixed assets.

future

Market value should depend on what is expected in the _________________.

EV Multiples

Similar to PE ratios, we would expect a firm with high growth opportunities to have high _______________________.

False, they are not very helpful by themselves and need to be compared to something

T/F: Ratios are still very helpful by themselves

Higher

The _________________ (higher/lower) the inventory turnover ratio, the better.

buyers and sellers trade

The current market value is the price at which what?

Payables Turnover

This turnover ratio measures how many times throughout the year the firm pays off its purchases on credit?

Total Asset Turnover

This turnover ratio measures that for every dollar we have invested in assets, we generate X amount in sales.

Days' Sales in Inventory

This turnover ratio measures the size of inventory relative to sales volume (how long our inventory sits before it is sold).

costs ; remaining face value ; amount invested

Under GAAP, audited financial statements show assets at _____________, show debt at __________________________________, and show equity at ____________________________.

1. Profit Margin 2. Return on Assets 3. Return on Equity 4. EBITDA Margin

What are the 4 profitability ratios?

1. How is the ratio computed? 2. What is the ratio trying to measure and why? 3. Unit: What is the unit of measurement? 4. Implication: What does the value indicate? 5. Solution: How can we improve the company's ratio?

What are the 5 things we must ask ourselves when doing ratio analysis?

1. Inventory Turnover 2. Days' Sales in Inventory 3. Receivables Turnover 4. Days' Sales in Receivables 5. Payables Turnover 6. Days' Purchases in Payables 7. Total Asset Turnover

What are the 7 Turnover (asset management) ratios?

Total liabilities

When looking at the leverage ratios (total debt ratio, debt-to-equity ratio, and the equity multiplier), "debt" really means _______________________________; which includes short-term liabilities and long-term liabilities

Inventory Turnover and Days' Sales in Inventory

Which two turnover ratios should you pay close attention to the period?

Income From Operations

EBIT is also commonly called what?

1. Operating efficiency (as measured by profit margin) 2. Asset use efficiency (as measured by total asset turnover) 3. Financial Leverage (as measured by the equity multiplier)

The DuPont identity tells us the ROE is affected by what 3 things?

Dupont Identity

The _____________________________ is an expression that shows a company's return on equity (ROE) can be represented as a product of three other ratios: the profit margin, the total asset turnover and the equity multiplier.

Enterprise Value Multiple

The ___________________________________ is especially useful because it allows comparison of one firm with another when there are differences in capital structure, taxes, or capital spending. The multiple is not directly affected by these differences.

Ratio Analysis

This allows for better comparison through time or between companies

Leverage Ratios

This category of ratios are intended to address the firm's long-run ability to meet its obligations or its financial leverage.

Turnover (asset management) ratios

This category of ratios are intended to describe how efficiently, or intensively, a firm uses its assets to generate sales.

Profitability Ratios

This category of ratios are intended to measure how efficiently the firm uses its assets and how efficiently the firm manages its operations.

Market Value

This category of ratios is based on information not necessarily contained in financial statements - the market price per share of the stock.

Liquidity ratios

This category of ratios typically focus on current assets and current liabilities and the primary concern is the firm's ability to pay its bill over the short run without undue stress.

Peer Group Analysis

This kind of analysis is used to compare your firm's financial statements to similar companies or within industries

Time-Trend Analysis

This kind of analysis is used to see how the firm's performance is changing through time

Times Interest Earned

This leverage ratio measures how well a company has its interest obligations covered

Cash Coverage

This leverage ratio readjusts the times interest earned ratio by factoring in the noncash expenses that have been deducted out, making it a more true measure of cash available to pay interest.

Total Debt Ratio

This leverage ratio takes into account all debts of all maturities to all creditors

Current Ratio

This liquidity ratio is a measure of short-term liquidity and the unit of measurement is either dollars or times.

Cash Ratio

This liquidity ratio is the amount of cash and short term equivalents a company has over current liabilities. It is an effective and quick way to determine if a company could have potential short-term liquidity issues.

Quick Ratio or Acid-Test Ratio

This liquidity ratio measures the same thing as the current ratio but takes into account the fact that inventory is relatively illliquid compared to cash

Market-To-Book Ratio

This market value ratio is an accounting number that reflects historical costs and therefore compares the market value of the firm's investments to their cost.

Enterprise Value (EV ratio)

This market value ratio is used to better estimate how much it would take to buy all of the outstanding stock of a firm and also to pay off the debt.

Enterprise Value Multiples (EV multiple ratio)

This market value ratio is used when the goal is to estimate the value of the firm's total business rather than just focusing on the value of its equity

Market Capitalization

This market value ratio is useful for potential buyers of a company and is equal to the firms' stock market price per share multiplied by the number of shares outstanding.

Price-Earnings Ratio

This market value ratio measures how much investors are willing to pay per dollar of Stock current earnings

Return on Equity (ROE)

This profitability ratio is a measure of generated profit per every dollar in equity (a measure of how the stockholders fared during the year)

Return on Assets (ROA)

This profitability ratio is a measure of profit per dollar of assets

EBITDA Margin

This profitability ratio looks more directly at operating cash flows than does net income and does not include the effect of capital structure or taxes

Profit Margin

This profitability ratio measures how much a company generates in net income for every dollar in sales.

Days' Sales in Receivables (also called the average collection period)

This turnover ratio measures how fast credit sales are collected

Inventory Turnover

This turnover ratio measures how fast inventory is sold (how many times we turn over the entire inventory during the year).

Days' Purchases in Payables

This turnover ratio measures how fast purchases are paid for

Receivables Turnover

This turnover ratio measures how many times throughout the year the firm collects their outstanding credit accounts and lends money again.

Current ; Quick

Using cash to buy inventory does not affect the _______________ ratio, but does reduce the ________________ ratio.

1 ; negative

We should expect to see a current ratio of at least ________, because anything less means that the net working capital is ________________.

1. Liquidity (short-term solvency or liquidity ratios) 2. Leverage (long-term solvency or financial leverage ratios) 3. Turnover (asset management or turnover ratios) 4. Profitability 5. Market

What are the 5 categories of financial ratios?

1. Total Debt Ratio 2. Debt-to-Equity Ratio 3. Equity Multiplier 4. Times Interest Earned 5. Cash Coverage

What are the 5 leverage ratios (long term solvency)?

1. Price-Earnings Ratio (PE ratio) 2. Market-to-Book Ratio 3. Market Capitalization 4. Enterprise Value (EV ratio) 5. Enterprise Value Multiples (EV multiples ratio)

What are the 5 market value ratios?