Finance

Net Profit Margin ratio tells us ____.

How much net income or profit is generated as a percentage of revenue.

Current ratio should be > than __, because ____. If the current ratio is too high, that means ____.

1, because that means CA > CL. IF the current ratio is too high, that can mean you are holding onto too much cash

The debt to equity ratio should be < ___, because ____. This ratio tells us that ______.

1. A ratio of 1 means that both creditors and shareholders contribute equally to the assets of the business. A ratio greater than 1 implies that the majority of the assets are funded through debt. Tells us that for every dollar of equity, we have ___ dollar of debt.

Total debt ratio should be between < than ____. It tells us that _____

< than 1. The ratio tells us the debt component of total assets - total equity since the right hand side of the balance sheet has debt + equity. Tells us that for every dollar of assets, we have ___ (Cents or dollars) of debts.

Cash Coverage Ratio should be > _____, because ______.

> 1, because the numerator tells us how much money the firm has to pay creditors.

Quick ratio should be > than ____, because ____. This ratio is good because ___.

> than 1, because a company that has a quick ratio of < 1 may not be able to fully pay off its CL in the short term, while a company having a ratio > 1 can instantly get rid of its current liabilities. Ex. A quick ratio of 1.5 indicates that a company has $1.50 of liquid assets available to cover each $1 of its current liabilities. This ratio is good because sometimes a firm's inventory has low liquidity (ability to convert assets into cash quickly)

The cash ratio should be between ___ and ____. because:

Between 0.5 and 1, because creditors prefer a high cash ratio, as it indicates that a company can easily pay off its debt. Although there is no ideal figure, a ratio of not lower than 0.5 to 1 is usually preferred.

EV to EBITDA ratio calculates _____.

Calculates a company's total monetary value or assessed worth. While some investors simply look at a company's market capitalization to determine a company's worth, other investors believe the enterprise value metric gives a more complete picture of a company's true value. That's because the enterprise value also takes into consideration the amount of debt the company carries and its cash reserves.

The total debt ratio tells us that for every dollar of assets, we have x dollars of _____.

Debt

The debt-to-equity ratio tells us that for every dollar of _____, we have x dollars of debt.

Equity

Long term ratios are also known as

Financial leverage ratios

Profitability ratios are of more interests to ____ and ____ than to creditors.

Firms and investors

NWC Turnover Ratio tells us that ______. The _____ the number, the more efficiently the firm is turning NWC into sales.

For every $1 of NWC, it translates into $x of sales. The higher the number, the more efficient the firm is in turning NWC into sales.

Total Asset Turnover ratio tells us ______. Again, this could be higher for retail companies.

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.

Day Sales in Inventory tells us ____. The unit is in ___.

How efficient a firm is in translating inventory to COGS or sales. The unit is in days.

ROE (Return on Equity) is a profitability ratio which tells us _____. If the ROE is higher than ROA, this tells us that _____.

How efficient the firm is in generating profits. If the ROE is > than the ROA, it means that the firm is using debt.

Fixed assets turnover ratio tells us ____. While utilities sector would have a lower fixed asset turnover, the retail sector would have a higher one above one because _____.

How efficiently a company is generating net sales from its fixed-asset investments. For example, a retail store would have a higher fixed asset turnover as they tend to have small asset bases but much higher sales volumes, so they're likely to have a much higher asset turnover ratio.

ROA (Return on Assets) is a profitability ratio which tells us _____. The ____ the better!

How profitable a company is relative to its total assets. The higher the better.

The receivables turnover ratio tells us _____. For example, a receivables turnover of 12.0 tells us _____. The ____ the better.

How quickly receivables are transferred into sales. For example, a receivables turnover of 12.0 tells us the firm is transferring receivables into sales 12x a year. The higher the better.

Why is debt attractive to shareholders?

It allows the firm to invest more and buy more assets, though it becomes risky because equity holders can then force a firm into bankruptcy. If a firm has no debt, all equity is transferred to assets. So, the percentages of ROE and ROA would be the same, but why invest in a riskless firm if you will get the same return on your investment as a T-bill that is safer?

NWC to TA Ratio is important because:

It tells us how much of a firm's investment is in NWC. Firms often need a lot of NWC, so how high is that investment as part of TA?

Day Sales in Receivables Ratio tells us ______. It is troublesome if it keeps _____.

It tells us that at any point, the firm has x days sitting in accounts receivables (days of credit given to customers). It is troublesome if it keeps increasing.

The P/E ratio should not be used if earnings are _____. Instead, use the ____ ratio. What is a "good" PE value?

Negative. Instead, use the price to sales ratio. A higher P/E ratio shows that investors are willing to pay a higher share price today because of growth expectations in the future.

Common Size Income Statement

Percentages of total sales

The DuPont Identity rewrites _____ as _____ _____.

ROE as return on assets * total assets turnover. If an investor wants to know why a firm's ROE is very low, they can break it up into net income/sales * sales/assets * assets/total equity to see which component is causing a low ROE. Either because of a lower profit margin or a low asset turnover (utilizing assets wrong) or a low equity multiplier (low if company does not have debt).

Times interest earned ratio (uses EBIT) tells us ______. It is also known as the _____ ratio. It should be > ____, because.

Tells us if the firm can afford to pay interest. It is also known as the interest coverage ratio. It should be > 2.5, because companies that have a times interest earned ratio of less than 2.5 are considered a much higher risk for bankruptcy or default and, therefore, financially unstable.

Common Base Year Standardizing

The common base year becomes the denominator Decimals, not percentages Compares that asset by that asset in the base year

With inventory turnover ratio, the _____ the better. It tells us _____.

The higher the better. Inventory turnover ratio tells us how well the firm is able to transfer inventory from COGS.

Why are long term ratios known as financial leverage ratios?

The more debt you have, the more level you are, and the more risky you are.

Market-to-Book ratio tells us _____. It should be around 1, because ____.

The ratio determines the market value of a company relative to its actual worth. The ratio should be ~= to 1. Less than 1 implies that a company can be bought for less than the value of its assets. A higher figure of around 3 would suggest that investing in a company will be expensive.

Asset management ratios are also known as _____ ratios.

Turnover ratios

Common Size Balance Statement

Uses Total Assets as base for all variables and gives a percentage Shows how much a variable is of the total asset (ex. if cash/total assets = 2.5%, it means ash makes up 2.5% of the firm's total assets). Lets you compare the firm with itself in all other years or with other firms despite size by scaling everything by total assets

Why do we calculate long term ratios?

We want to know, beyond a year, how likely a firm is to go bankrupt.

The Price-to-Sales ratio is used instead of P/E ratio when _____. Unlike P/E, though, the LOWER this ratio the better, because ____.

When earnings are negative. This ratio is better when it is lower because a low price to sales ratio means a good investment because investors are paying less for each unit of sales.

Solvency is aka

liquidity

Solvency ratios tell us:

whether the firm will be staying alive in the short term or long term, aka liquidity