Term
| What is debt to equity ratio? |
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Definition
| measures the relationship between the amount of debt financing (borrowing) and the amount of equity financing (owner’s fund) |
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Term
| What does Debt to equity mean |
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Definition
indicates how much debt in ratio with equity, ratio above 100% means firm has more debt than equity therefore lenders are providing more financing than the owners
Rule of thumb: <1:1
investors or shareholders? Have to pay off debtors, investors only get liquidation priority |
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Term
| how to use Debt to equity |
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Definition
| calculated by dividing total liabilities by owner’s equity |
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Term
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Definition
| It measures how well a firm uses its assets. |
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Term
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Definition
| They reflect the speed with which resources are converted to cash or sales. |
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Term
| What is a ratio of stability? and explain it |
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Definition
| Inventory Turnover ratio:(calculated by dividing cost of goods sold by the average inventory) measures the speed with which inventory moves through the firm and is turned into sales. The acceptable turnover ratio depends on the line of business. |
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Term
| What is profitability ratio? |
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Definition
| -it measures how well the firm is using its resources to generate profit and how efficiently it is being managed |
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Term
| Why use profitability ratio? |
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Definition
| A firm’s profits can be related to its sales, equity, or shares value |
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Term
| What are the main profitability ratios? And expand on them. |
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Definition
Net Profit margin, Gross profit margin, return on investment
Net profit margin: measures how much profit each sales dollar generates generate during the period; a high or rising ratio suggests that the company is managing its sales and expenses efficiently.
Gross Profit Margin: what remains from sales after a company pays out the cost of goods sold.
Return on investment: measures how effectively the firm uses its capital to generate profit; the higher the ROI the better |
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Term
| What is marketability ratio? |
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Definition
| It measures the degree and effect of the firm’s use of borrowed funds (debt) to finance its operations. |
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Term
| Why would you use marketability ratio? |
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Definition
| They want to make sure the firm has a healthy mix of debt and equity. If the firm relies too much on debt, it might have trouble meeting interest payments and repaying loans. |
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Term
| What are the main stability ratio? |
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Definition
| Debt to equity, leverage, interest coverage ratio |
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Term
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Definition
| It measures the degree to which a company had locked itself into fixed financial costs; implies that a given change in sales will result in a greater change in profit. |
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Term
| What is interest coverage ratio? |
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Definition
| a calculation of a company's ability to meet its interest payments on outstanding debt |
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Term
| Explain the different types of marketability ratios. |
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Definition
Price/Earnings ratio, Earnings per share, dividend yield ratio, and divident payout.
Price/Earnings ratio: measures the multiple of current year's earnings that investors are willing to pay for the company's shares.
Earnings per share: measure of the reutn on investment that is based on the number of shares outstanding.
Dividend yield ratio: a measure of the percentage return that shareholders earn from the dividends they receive.
Dividend payout: the amount of cash that a company sends to its shareholders in the form of dividends. |
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Term
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Definition
-it is the effect of changes in Costs or Volumes on Profits
-Tool used for decision-making |
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Term
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Definition
Shows impact of operating leverage
Degree to which locked into fixed operating costs
-Must sell more to cover fixed costs (Risk)
-But once covered- Leveraged effect on profit (return) |
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Term
| What is CVP also used for |
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Definition
-It is also used for 'Breakeven' Analysis
-Revenues= expenses or (Revenue-Expenses=0) |
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Term
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Definition
-Constant regardless of level of production and sales
-example: rent, insurance, salaries |
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Term
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Definition
-Total depends on level of production and sales
-increases/decreases with changes in level of production |
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