Financial Ratios & Analysis Lecture Notes

Vocabulary flashcards covering key financial ratios, their formulas, and related analytical concepts from the Financial Ratios & Analysis lecture.

Ratio Analysis

provides a meaningful comparison of a company to its industry

Profitability Ratios

Metrics (e.g., GPM, NPM, ROA, ROE) that gauge a firm’s ability to generate earnings relative to sales, assets, or equity.

Asset Utilization Ratios

Turnover ratios (e.g., AR Turnover, Inventory Turnover, Total Asset Turnover) measuring how efficiently a company uses its assets to create sales.

Liquidity Ratios

Indicators (e.g., Current Ratio, Quick Ratio) that assess a firm’s short-term ability to pay obligations as they come due.

Debt Utilization Ratios

Leverage measures (e.g., Debt-to-Total Assets, Times Interest Earned, Fixed Charge Coverage) revealing how much debt financing a firm employs and its capacity to service it.

Gross Profit Margin (GPM)

Gross Profit ÷ Net Sales; shows the percentage of sales remaining after covering cost of goods sold—higher values indicate efficient production or pricing.

Net Profit Margin (NPM)

Net Profit (Income) ÷ Net Sales; reveals the portion of revenue left after all expenses, taxes, and losses are deducted.

Return on Assets (ROA)

Net Income ÷ Total Assets; measures how effectively management uses total assets to generate profit.

Return on Equity (ROE)

Net Income ÷ Stockholders’ Equity; shows the return earned on the owners’ investment in the business.

Accounts Receivable Turnover

Net Credit Sales ÷ Average Accounts Receivable; indicates how many times per year receivables are collected (11.4× in the Saxton example).

Average Collection Period (ACP)

Average Accounts Receivable ÷ (Average Credit Sales per Day); estimates the average days it takes to collect cash from credit customers (≈32 days in the example).

Inventory Turnover

Cost of Goods Sold ÷ Ending Inventory; shows how often inventory is sold and replaced in a year (8.1× for Saxton).

Total Asset Turnover

Net Sales ÷ Total Assets; reflects how efficiently all assets generate sales (2.5× in the example).

Current Ratio

Current Assets ÷ Current Liabilities; basic liquidity test of a firm’s short-term solvency.

Quick Ratio (Acid-Test)

(Current Assets − Inventory) ÷ Current Liabilities; stricter liquidity measure excluding less-liquid inventories.

Debt-to-Total Assets Ratio

Total Liabilities ÷ Total Assets; indicates the percentage of assets financed by creditors.

Times Interest Earned (TIE)

Earnings Before Interest & Taxes ÷ Interest Expense; measures the margin of safety for interest payments.

Fixed Charge Coverage

(EBIT + Fixed Charges) ÷ (Interest + Fixed Charges); assesses ability to cover all fixed financing obligations.

Du Pont System of Analysis

Framework that decomposes ROA and ROE into profit margin, asset turnover, and leverage components to pinpoint the true sources of returns.

Trend Analysis

Evaluating financial ratios over several periods to spot performance patterns and directional changes.

Solvency

A company’s long-term ability to meet debt obligations; often assessed with leverage ratios.

Leverage

Use of borrowed funds to amplify returns; higher leverage increases both potential gains and financial risk.

Turnover (General)

Any ratio expressing the number of times an asset or liability account is cycled through in a period, reflecting efficiency.

Liquidity (Concept)

The ease with which assets can be converted to cash to meet short-term obligations.

Profitability (Concept)

The degree to which a firm can earn a profit relative to sales, assets, or equity.

Asset Utilization (Concept)

The effectiveness with which a firm uses its resources to generate revenue.

Extraordinary Loss

A non-recurring, unusual expense item (e.g., Saxton’s ₱200,000) deducted before calculating taxable income.

Cost of Goods Sold (COGS)

Direct costs attributable to production of goods sold; used in computing Gross Profit Margin and Inventory Turnover.

Net Sales

Total sales revenue minus returns, allowances, and discounts; serves as the denominator in many profitability and turnover ratios.