Term
| Name the five categories used to describe ratios: |
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Definition
Liquidity
Asset Management
Profitability
Market-Value
Financial Leverage |
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Term
| This category of ratios indicates the ability of an organization to meet short-term obligations to creditors as they mature or come due. |
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Definition
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Term
| Define Net Working Capital |
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Definition
| The Net Working Capital of a firm is its current assets minus current liabilities. |
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Term
| The __________ Ratio is a measure of a company's ability to pay off its short-term debt as it comes due. |
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Definition
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Term
| How is Current Ratio calculated? |
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Definition
| Current Ratio = Current assets/current liabilities |
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Term
| What does a low current ratio indicate? What does a high ratio indicate? |
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Definition
| A low current ratio may indicate that a company faces difficulty paying bills. A high current ratio may indicate high liquidity but also suggest that funds are not effectively being employed. |
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Term
| How is the Quick Ratio or Acid-Test Ratio calculated? How does it differ from the Current Ratio? |
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Definition
Quick Ratio = (Cash + Accounts receivable)/Current Liabilities
The Acid-Test Ratio differs from the Current Ratio because it excludes inventory from current assets (as it is the least liquid of current assets). |
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Term
| Which industries care most about Liquidity ratios? Which are less concerned? |
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Definition
| Liquidity is particularly important for manufacturing and retail industries. Other industries such as Real Estate, service industries, and industries with mostly cash assets are less concerned about Liquidity. |
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Term
| Both assets and liabilities with maturities of __ years or less are considered to be current for financial statement purposes. |
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Definition
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Term
| What is another name to describe Asset Management Ratios? |
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Definition
| "Activity Ratios" or "Utilization Ratios" |
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Term
The ________ is calculated by dividing the year-end accounts payable amount by the firm's average cost of goods sold per day.
??? = Accounts Payable/(Cost of Goods Sold/365 Days) |
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Definition
| The Average Payment Period |
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Term
| This ratio indicates how efficiently the firm is utilizing its assets to produce revenue or sales. It is a measure of the dollars of sales generated by $1 of the organization's assets. |
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Definition
The Total Assets Turnover Ratio (a.k.a. Return on Assets or ROA)
= Net Sales/Total Assets (includes fixed and current) |
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Term
| _________ ___________ operations/industries may require more than $1 of assets for $1 of sale, while __________ __________ (or just ______) industries or operations may require very few or almost no assets for $1 of sales. |
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Definition
Capital Intensive industries may require more than $1 of assets for $1 of sales.
Capital Light or just Light industries may require few or no assets for $1 of sales. |
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Term
| This ratio indicates the average number of days that sales are outstanding. In other words, it reports the number of days it takes, on average, to collect credit sales. This ratio measures the days of financing that a company extends to its customers. |
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Definition
The Average Collection Period (a.k.a. Days Receivables Outstanding)
= Accounts Receivable/(Net Sales/365 days) |
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Term
| This ratios category indicates the extend to which borrowed or debt funds are used to finance assets. It also assesses the ability of the firm to meet its debt payment obligations. |
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Definition
| Financial Leverage Ratios |
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Term
| How is the Total Debt to Total Equity Ratio calculated? |
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Definition
| Total Debt/Total Equity = ___% |
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Term
| What does the Total Debt to Total Equity ratio tell about a company? |
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Definition
| It indicates an organization's total debt in relation to the total dollar amount owners have invested in the firm. "For every dollar of equity, the firm has borrowed 'x' amount." |
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Term
| What does it mean if a company is "highly leveraged"? |
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Definition
| "Highly leveraged" means that an organization has a high amount of debt in proportion to its owner's equity. In general, as the Debt to Equity ratio increases, the returns to owners are higher, but so are risks. |
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Term
| Name two Financial Leverage ratios other than Total Debt to Equity and how they may be calculated. |
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Definition
Total Debt to Total Assets (shows portion of total assets financed by all creditors and debtors)
% = Total Debt/Total Assets
Equity Multiplier (shows use of leverage by firm, more assets relative to equity suggests greater use of debt)
= Total Assets/Total Equity |
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Term
| This category of ratios indicates how efficiently a company uses assets to obtain profit. |
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Definition
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Term
| This ratio measures the efficiency of the use of your capital (capital meaning Long-Term Debt + Equity). |
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Definition
Return on Capital Employed or ROCE
% = EBIT/Capital Employed |
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Term
| This ratio must be compared to other companies in the same industry or to the same company over time, otherwise it is useless alone. The higher percentage of this number, the better. This number must be higher than the company's cost of capital. |
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Definition
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Term
| This ratio indicates how much net income is generated for each $1 of equity invested in the firm. The bigger, the better. This ratio should be compared over time, cross-company or with industry average. |
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Definition
Return on Equity or ROE
% = Net Income/Equity |
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Term
| Explain why a highly leveraged company might have an inflated ROE. |
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Definition
| Highly leveraged means that a company has a high proportion of debt relative to shareholder contributions. If a company has little to zero equity (mostly debt), the return from net sales will cause ROE to be inflated percentage. |
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Term
| This category of ratios indicates how efficiently a company uses its assets to obtain revenue. |
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Definition
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