Term
| Gross Profit Margin
Also known as:
Gross Margin |
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Definition
| Gross Profit/
Sales
(Gross profit = Sales – COGS) |
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Term
| Operating Profit Margin
Also known as:
Operating margin |
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Definition
| EBIT/
Sales
(EBIT = Earnings before interest and taxes) |
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Term
| Name 6 common turnover-control ratios |
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Definition
| 1. Asset turnover
2. Fixed-asset turnover
3. Inventory turnover
4. Collection period
5. Days’ sales in cash
6. Payables period |
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Term
| Name 3 common return ratios |
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Definition
| 1. Return on equity (ROE)
2. Return on assets (ROA)
3. Return on invested capital (ROIC) |
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Term
| Name 3 common types of profit margins |
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Definition
| 1. Net profit margin
2. Gross profit margin
3. Operating profit margin |
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Term
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Definition
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Term
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Definition
| Tax/
EBT
Earnings before taxes
= EBIT – Income tax |
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Term
| Total Asset Turnover
Also known as:
Asset turnover |
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Definition
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Term
| Net Fixed Asset Turnover (NFATO)
also known as
Fixed-asset turnover |
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Definition
| Sales/
Net fixed assets
also written as:
Sales/
Net property, plant, and equipment |
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Term
| Cash to Sales (Cash Ratio) |
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Definition
| Cash/
Total annual sales
Note: this ratio gives end-of-year cash
as a percentage of annual sales.
A related ratio, Days sales in cash, equals
365 times this percentage |
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Term
| Times Burden Covered ratio |
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Definition
| EBIT /
Interest + [principal payment x (1 – tax rate)] |
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Term
| Accounts Receivable Days-on-Hand (DOH)
also known as:
Days sales in receivables
Collection period |
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Definition
Accounts receivable /
Sales per day |
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Term
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Definition
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Term
| Inventory Days-on-Hand (DOH)
also known as:
Days COGS in inventory |
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Definition
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Term
| Interest Coverage Ratio
also known as:
Times Interest Earned |
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Definition
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Term
| Accounts Payable Days-on-Hand
also known as
Payables period (Higgins)
Days Payable in Purchases |
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Definition
Accounts payable/
Purchases per day |
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Term
| Current and quick ratios
(meaning) |
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Definition
| These ratios measure liquidity, i.e. to what extent a company has access to sufficient cash to meet all of its ongoing needs. If current assets exceed current liabilities by a lot – say 2-to-1 – then the company has lots of liquidity. If the current ratio is close to 1-to-1, the company may have trouble paying its bills, particularly if it does not have unused bank lines available. |
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Term
| Return on Invested Capital
(ROIC)
(equation showing breakdown into two drivers) |
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Definition
| Net operating profit/
Capital
(operating efficiency)x(capital management)
Net operating profit = EBIT x (1 – tax rate)
NOPM = net operating profit margin |
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Term
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Definition
| Current Assets – Current Liabilities |
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Term
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Definition
| Current assets - Non-interest bearing current liabilities |
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Term
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Definition
Current Assets /
Current Liabilities |
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Term
| Quick ratio
also known as:
Acid test |
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Definition
| Current Assets - Inventories / Current Liabilities |
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Term
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Definition
| These ratios measure the firm’s value added. Firms such as retail stores that add little value to their inputs will work on thin margins, while firms such a chip manufacturers that greatly transform their inputs enjoy much larger margins. |
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Term
| Asset Turnover
(interpretation) |
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Definition
| This measures the asset intensity of a business, the quantity of assets it needs to generate a dollar of sales. Firms with low margins need high asset turnover to compensate, while those with high margins typically require many more assets per dollar of sales. |
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Term
| Return on Assets
(interpretation) |
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Definition
| ROA shows the income earned by shareholders per dollar of assets. It is the product of profit margin and asset turnover, and so reflects the tradeoff by which low-margin firms have high turnover and high margin firms have low turnover. |
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Term
| Days sales in receivables
(interpretation) |
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Definition
| This shows the average amount of time it takes a receivable to be collected, and therefore reflects the credit policies of the firm. It will normally be in the 30-45 day range, though some businesses may allow their customers six months or more to pay. Many firms regularly press their clients for prompt payment. |
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Term
| Return on Equity
(interpretation) |
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Definition
| ROE is the best summary accounting measure of how well a company has done for its shareholders. It shows the amount of income earned by the shareholders as a percentage of the total amount invested by shareholders. It is the product of ROA and a measure of financial leverage (Assets/Equity). |
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Term
| Days COGS in Inventories
(interpretation) |
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Definition
| This ratio shows how much time it takes to produce and sell the final product. The more efficient the manufacturing process, the smaller the inventories can be, conserving cash |
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Term
| Return on Invested Capital
(ROIC)
(interpretation) |
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Definition
| ROIC (sometimes called Return on Net Assets or RONA) shows a combined return on debt and equity taken together. It shows what ROE would be if all the debt were equity. That is, ROIC is a kind of deleveraged ROE. It is often preferred to ROE by lenders, who are interested in the profitability of the entire capital structure rather than just the profitability of equity. |
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Term
| Days Payable in Purchases
(interpretation) |
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Definition
| This measures how quickly the company is paying its suppliers. It is the mirror image of days sales in receivables and will also normally fall in the 30-45 day range. If this number should drift higher, it may reflect financial stress, i.e. the difficulty a company is having paying its bills. |
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Term
| Coverage
(also known as Times Interest Earned ratio)
(interpretation) |
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Definition
| Coverage measures the ease with which a company can meet its interest requirements, since interest is paid out of EBIT. When coverage is high, the debt is of high quality and is likely to be highly rated. When coverage is low, a sudden downturn in EBIT could lead to debt servicing problems. |
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Term
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Definition
| Also known as EBIT
= Revenues
- COGS
- - R&D
- SG&A
= Revenues minus all expenses except interest and taxes |
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Term
| Return on Equity
(ROE)
(Dupont equation) |
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Definition
| Net Income / Sales X Sales / Assets X Assets/Equity
= profit margin x asset x “financial turnover leverage"
= Return on assets x “financial leverage |
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Term
| List the 3 claimants on EBIT |
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Definition
| Debt holders (interest)
Government (taxes)
Stock holders (net income) |
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Term
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Definition
Debt is money borrowed from a lender
at an interest rate |
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Term
| Operating Return on Assets |
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Definition
| EBIT/Assets = EBIT/Sales X Sales/Assets
= Operating margin x Asset turnover |
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Term
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Definition
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Term
|
Definition
| = Net Income/Assets
= Net Income/Sales X Sales/Assets
= Profit margin x Asset turnover |
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Term
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Definition
| Usual measure of leverage =
Debt/Capital = Debt/Debt + Equity
This ratio approaches 1 as debt increases.
The ratio used in the decomposition of ROE, called
“financial leverage” = assets/equity
This ratio becomes large as debt increases. |
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Term
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Definition
Price per share /
Earnings per share |
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Term
| Debt to assets
(market value) |
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Definition
Total liabilities /
# of equity shares x market price + liabilities |
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Term
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Definition
Cash and securities /
Sales per day |
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Term
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Definition
Assets /
Equity
This is the measure of leverage which
is used in the Dupont equation for ROE |
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