Chap 5. Financial Ratios

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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


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