# Shared Flashcard Set

## Details

Accounting for Managers Test 3
Ratios
60
Accounting
11/07/2012

Term
 Three categories of profit ratios:
Definition
 1. margin 2. return 3.shareholder earnings ratios
Term
 What does Net Profit Margin Percentage tell us?
Definition
 % of sales was retained by the time we got to the bottom line of the income statement.
Term
 Operating Profit Margin
Definition
 a. Leaves out taxes b. tells what percentage of sales is left after COGS and OP EXP.
Term
 Relative R&D
Definition
 How much is the organization investing in creating future products and services
Term
 4 Margin Ratios
Definition
 1. Net Profit Margin % 2. Gross Profit Margin 3.Operating profit Margin 4.Relative R\$D 5.
Term
 4 Return Metrics
Definition
 1.Return on Assets 2.Sales to fixed assets 3.Return on Investment 4.Return on Equity
Term
 Return on Assets
Definition
 what sort of return did we generate for our investment in ASSETS? How well our assets are working for us.
Term
 Sales to Fixed Assets
Definition
 How much sales are generated from fixed assets, like planes etc.
Term
 ROI
Definition
 a. can be calculated in a variety of ways b.shows how well the investments made by the company are doing
Term
 ROE
Definition
 Was the investment in the organization, in terms of equity worth it?
Term
 2 Shareholder Earnings Ratios
Definition
 1. Earnings per Share 2.Price/Earnings Ratio
Term
 Earnings Per Share
Definition
 a.Favorite metric for wall street b. can be manipulated by buying back treasury stock and changing the number of outstanding shares
Term
 Price/Earnings Ratio
Definition
 How much are the stockholders paying for the earnings? Used to determine whether a stock is over or under priced.
Term
 3 Project Ratios
Definition
 1. IRR 2. ROI 3.Dollar Value added
Term
 IRR
Definition
 the rate of return that would cause the present value of all future cash flows to be \$0. Gives a sense of long term risk. Can be calculated many different ways.
Term
 More on IRR
Definition
 1.It gets higher or better the cash the project earns. 2.The less you invest in the project, the better IRR will be, because it is a rate of return. The less investment you have to cover with profits, the better.
Term
Definition
 gives us the total dollars generated by a project.
Term
 Three ways to use money:
Definition
 1. Spend it on fixed assets 2.Spend it on capital assets 3..Or let it sit around as cash or investments.
Term
 Working Capital to Sales
Definition
 indicates how well working capital worked in generating sales. Ideally you'd like to invest very little in working capital in order to make a load of sales.
Term
 Working Capital Turnover
Definition
 tells you how efficiently working capital was used to generate sales.
Term
 Current ratio
Definition
 1.Do we have the right amount invested in working capital 2. we want 1 to 1. 3. only want numerator large if included raining day cash.
Term
 Quick Ratio
Definition
 a.k.a. ACID TEST. Same as current ratio, minus inventory, making it a better liquidity ratio.
Term
 Inventory to working capital
Definition
 Does not provide a very valid comparison. Tells us what proportion of working capital is made up by inventory
Term
 Days' supply of Inventory
Definition
 measures how many days' worth of inventory is sitting around.
Term
 Inventory Turnover
Definition
 number of times inventory is turned over in a month, or year.
Term
 Days' Sales Outstanding
Definition
 Tells us how long it takes to collect from our customers.
Term
 Accounts receivable turnover
Definition
 same as Days' Sales Outstanding expressed in number of times turned over in a year.
Term
Definition
 This metric might give us an indication of how unreliable our customers are.
Term
 Accounts receivable to Accounts Payable
Definition
 Tests liquidity, should = one or less.
Term
 Cash Conversion Cycle
Definition
 very important! Tells us the number of days it takes the organization to turn an investment in its products and services into cash.
Term
 What causes the difference between net income and cash?
Definition
 The accrual method of accounting
Term
 Operating Cash Index
Definition
 GOOD- If the numerator is substantially different from the denominator, this might indicate that the organization has a hard time converting its profits into cash.
Term
 Cash Ratio
Definition
 quick ratio less accounts receivable. just your current liquid resources contrasted against current liabilities.
Term
 Cash to Working Capital
Definition
 the proportion of cash to total working capital, can be a little misleading because the denominator includes both positives
Term
 Cash turnover ratio
Definition
 How many times was the investment in cash realized in sales? How hard did your cash work for you in generating sales?
Term
 Cash to dividends
Definition
 asks us to determine if the entity has enough cash to meet dividend obligations
Term
Definition
 enough money to to the extra stuff
Term
 Dividend payout of cash from operations
Definition
 gives us another perspective on dividend obligations and cash. How able is the organization to generate enough cash from operations to pay dividends?
Term
 Depreciation Impact Ratio
Definition
 helps refine your diagnosis of what might be going amiss in the operating cash index. Since depreciation is a non-cash expense, it reduces net income but not cash!
Term
 Depreciation to total fixed assets
Definition
 indicates the age of fixed assets.
Term
Definition
 often cheaper than equity financing because equity investors often expect a higher return.
Term
 Why do equity investors require a higher return?
Definition
 they are taking a higher risk, and interest on loans is tax-deductable
Term
Definition
 have to answer to the people to whom you sell it, they become owners.
Term
Definition
 dont have to answer to lenders or equity holders
Term
 Three ways to finance a company:
Definition
 1.Debt 2.Equity 3.Earnings
Term
 How many start-up companies are actually stars
Definition
 1 out of ten
Term
 Debt to Equity
Definition
 a. contrasts the components of the right side of the balance sheet. b.tells us where the organization gets money to operate. c.Contrasts debt with the combination of stock and retained earnings.
Term
 Debt Ratio
Definition
 a. effected by long sales cycle b.instead of contrasting debt against equity, we contrast it against the total resources we have available to pay off that debt
Term
 Cash to Long-term debt
Definition
 contrasts the amount of cash the organization holds to the debt obligation. Indicates the company's ability to pay off its debt with the cash it holds.
Term
 Long-term debt payment ratio
Definition
 tells us how much cash we got by issuing long-term debt versus how much cash we had to pay out in our obligation on long-term debt.
Term
 % of Cash Sources Required for Long-term Debt
Definition
 proportion of cash that is dedicated to paying off debt.
Term
 Short-term debt to all debt ratio
Definition
 does it prefer to operate on short-term debt-on lines of credit, for example-or on longer obligations
Term
 Cash to current maturities of long term debt*
Definition
 IMPORTANT-how much a company is obligated to pay on its long-term debt right now versus how much cash it has available.
Term
 Fixed charge coverage
Definition
 ability to pay basic obligations
Term
 Receivables to long-term debt *
Definition
 how well accounts receivable can pay off long term debt
Term
 10 Debt Ratios
Definition
 1.Debt to equity 2.Debt 3.Cash to long term 4.long-term debt payment 5.%of cash sources required for long-term debt 6.short-term debt to all debt 7.long-term to all debt 8.Cash to current maturities of long-term* 9.Fixed Charge Coverage 10.Receivables to Long-Term debt*
Term
 3 Equity Ratios
Definition
 1.Dividend Payout 2.% of Earnings retained 3.External Financing Index
Term
 External Financing Index
Definition
 contrasts how much cash generated through operations and how much is brought in externally
Term
 2 Capital Investment Ratios
Definition
 1.Reinvestment Ratio 2.Capital Investment Per Dollar of Cash
Term
 Capital Investment per Dollar of Cash
Definition
 looks at the priority that the organization puts on investing in capital assets
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