Term
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Definition
| Normalize balance sheets and income statements and allow comparison of performance across firms and for a single firm over time. |
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Term
| Vertical Common Size balance sheet |
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Definition
| expresses all balance sheet accounts as a percentage of total assets (or biggest number on balance sheet) |
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Term
| Vertical Common Size Income Statement |
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Definition
| Expresses all income statement items as a percentage of sales (or biggest number on income statement) |
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Term
| Horizontal Balance Sheet and Income Statement |
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Definition
| Analyze trends over time Divisors are the first year values, so they are all 1.0 |
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Term
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Definition
| [image][image][image][image][image][image][image][image] |
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Term
| Limitations of Finacial ratios |
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Definition
- not useful when viewed in isolation (only valid when used in comparison)
- Comparisons with other companies are difficult because of different accounting treatments
- Difficult to find comparable industry ratios for a company that operates in many industries
- Conclusions cannot be made from viewing one set of ratios
- Determing the target or comparison ratio is difficult
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Term
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Definition
| measure the firm's ability to satisfy short term obligations |
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Term
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Definition
| Measure the firm's ability to satisfy long-term obligations |
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Term
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Definition
Best known measure of Liquidity
[image] |
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Term
| Current Ratio of less than 1 |
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Definition
| Means the firm has negative working capital and may be facing liquidity crisis |
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Term
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Definition
| = Current Assets - Current Liabilities |
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Term
| Quick Ratio (acid test ratio) |
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Definition
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Term
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Definition
[image]
*Note equation is correct should equal "Cash ratio" |
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Term
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Definition
| The higher the liquidity ratio the more likely the firm will be able to pay its short-term bills |
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Term
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Definition
Total Debt
Total Equity
(total debt divided by total equity) |
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Term
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Definition
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Term
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Definition
Total Assets
Total Equity
(Total assets divided by total equity) |
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Term
| Common Size Income Statement |
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Definition
| Presents each income statement item as a percentage of sales. Measures how well the company generates operating profits and net profits from sales |
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Term
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Definition
| examines how good management is at turning their efforts into profits |
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Term
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Definition
- [image]
- ratio of Gross profit to sales (net sales = revenue)
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Term
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Definition
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Term
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Definition
Net Income
Revenue
(ratios of net income to sales) |
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Term
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Definition
| Give indications of how well a firm utilizes various assets such as inventory and fixed assets. (Inventory turnover, receivables turnover, total assets turnover) |
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Term
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Definition
Annual Sales
average receivables |
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Term
| Days of Sales Outstanding (Average Collection Period) |
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Definition
365
receivables turnover
(average number of days for the company's customers to pay its bills) |
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Term
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Definition
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Term
| Days of Inventory on hand (average inventory processing period) |
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Definition
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Term
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Definition
Purchases
Average Trade payables |
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Term
| Payables Payment Period (number of days of payables) |
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Definition
365
payables turnover ratio
(365 / payables turnover) |
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Term
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Definition
Revenue
Average Total Assets
(revenue / average total assets)
The effectiveness of the firm's use of its total assets to create revenue
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Term
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Definition
Revenue
average net fixed assets
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Term
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Definition
Revenue
average working capital
How effectively a company is using its working caputal |
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Term
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Definition
Cash + Marketable Securities + Receivables
average daily expenditures
Measure of liquidity that indicates the number of days of average cash expenditures the firm could pay wih its current liquid assets. |
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Term
Cash Conversion Cycle
(length of time it takes to turn the firm's cash investment in inventory back to cash) |
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Definition
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- (Inventory Conversion Period) + (Receivables Conversion Period) - (Payables Conversion Period)
or
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| = | Avg. Inventory
COGS / 365 | + | Avg. Accounts Receivable
Revenue / 365 | – | Avg. Accounts Payable
COGS / 365 |
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Term
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Definition
Total Debt
Total Shareholder's Equity
Increases or decreases in ratio show a greater or lesser increase on debt financing
Total debt = (long-term debt) + (interest bearing short term debt) |
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Term
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Definition
Total Debt
(Total debt) + (Total shareholder's equity)
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Term
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Definition
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Term
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Definition
Average Total assets
Average Total Equity |
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Term
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Definition
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Term
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Definition
EBIT + Lease Payments
Interest payments + Lease Payments
Large lease payments will reduce the ratio significantly. Fixed charge ratio is more relevant for companies that lease a large portion of their assets (ie. airlines). |
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Term
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Definition
= (long-term debt) + (Short term debt) + (common and preferred equity)
or
= total assets |
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Term
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Definition
Operating income
Revenue
or
EBIT
Revenue |
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Term
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Definition
EBT
Revenue
(EBT = EBIT - interest) |
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Term
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Definition
Net Income + (interest expense * (1-tax rate))
average total assets |
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Term
| Operating Return on Assets |
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Definition
EBIT
average total assets |
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Term
| ROTC (return on total capital) |
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Definition
EBIT
average total capital |
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Term
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Definition
Net Income
average total equity |
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Term
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Definition
(Net income) - (preferred dividends)
average common equity
or
Net income available to common stockholders
average common equity |
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Term
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Definition
- [image]
- (net profit margin) * (asset turnover) * (leverage ratio)
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Term
| ROA (from DuPont Formula) |
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Definition
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Term
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Definition
= (NI/EBT) * (EBT/ EBIT) * (EBIT/revenue) * (revenue/total assets) * (total assets/ total equity)
(NI/EBT) = tax burden
(EBT/EBIT) = interest burden
(EBIT/revenue) = EBIT margin
ROE = (Tax burden) * (interest burden) * (EBIT margin) * (asset turnover) * (financial leverage) |
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Term
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Definition
g = RR * ROE
how fast the firm can grow with out additional external equity issues while holding leverage constant
RR = retention rate |
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Term
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Definition
= 1 - (dividend payout ratio)
or
(NI available to common) - (dividends declared)
(NI available to common) |
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Term
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Definition
Dividends Declared
NI Available to common |
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Term
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Definition
Standard Deviation of variable
Expected value of variable |
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Term
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Definition
| estimate of the dollar size of loss that a firm will exceed only some specific percent of the time. |
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