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Financial Analysis
Chapter 4
26
Business
Undergraduate 2
03/28/2011

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Term
Liquid Asset
Definition
An asset that can be converted to cash quickly without having to reduce the asset's price very much.
Term
Liquidity Ratios
Definition
Ratios that show the relationship of a firm's cash and other current assets to its current liabilities.
Term
Current Ratios
Definition
This ratio is calculated by dividing current assets by current liabilities.  It indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future.
Term
Quick (Acid Test) Ratio
Definition
This ratio is calculated by deducting inventories from current asets and then dividing the remainder by current liabilities.
Term
Asset Management Ratios
Definition
A set of ratios that measure how effectively a firm is managing its assets.
Term
Inventory Turnover Ratio
Definition
This ratio is calculated by dividing sales by inventories.
Term
Days Sales Outstanding (DSO)
Definition
This ratio is calculaed by dividing accounts receivable by average sales per day; it indicates the average length of tiem the firm must wait after making a sale before it receives cash.
Term
Fixed Assets Turnover Ratio
Definition
The ratio of sales to net fixed assets.
Term
Total Assets Turnover Ratio
Definition
This ratio is calculated by dividing sales by total assets.
Term
Debt Management Ratios
Definition
A set of ratios that measure how effectively a firm manages its debt.
Term
Debt Ratio
Definition
The ratio of total debt to total assets.
Term
Times-Interest-Earned (TIE) Ratio
Definition
The ratio of earnings before interest and taxes (EBIT) to interest charges; a measure of the firm's ability to meet its annual interest payments.
Term
Profitability Ratios
Definition
A group of ratios that show the combine effects of liquidity, asset management, and debt on operating results
Term
Operating Margin
Definition
This ratio measures operating income, or EBIT, per dollar of sales: it is calculated by dividing operating income by sales.
Term
Profit Margin
Definition
This ratio measures net income per dolar of sales and is calculated by dividing net income by sales.
Term
Return on Total Assets (ROA)
Definition
The ratio of the net income to total assets.
Term
Basic Earning Power (BEP) Ratio
Definition
This ratio indicates the ability of the firm's assets to generate opearating income; it is calculated by dividing EBIT by total assets.
Term
Return on Common Equity (ROE)
Definition
The ratio of net income to common equity; measures the rate of return on common stockholder's investment
Term
Market Value Ratios
Definition
Ratios that relate the firm's stock price to its earning and book value per share.
Term
Price/Earnings (P/E) Ratio
Definition
The ratio of the price per share to earning per share; shows the dollar amount investors will pay for $1 of current earnings
Term
Market/Book (M/B) ratio
Definition
The ratio of a stock's market price to its book value.
Term
Trend Analysis
Definition
An analysis of a firm's financial ratios over time; used to estimate the likelihood of improvement or deterioration in its financial condition
Term
DuPont Equation
Definition
A formula that shows that the rate of return on equity can be found as the product of net profit margin, total assets turnover, and the equity multiplier.  It shows the relationships among asset managemtn, debt managemetn, and profitability ratios.
Term
Benchmarking
Definition
The process of comparing a particular company with a set of benchmark companies.
Term
"Window Dressing" Techniques
Definition
Techniques employed by firms to make their financial statements look beter than they really are.
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