Business Finance Chapter 4 | Formulas & Definitions

ratio analysis - purpose and categories

helps evaluate finance statements through standardizing numbers

5 categories

liquidity, asset management, debt management, profitability, market value

liquidity ratios - purpose and categories

will a firm be able to pay off debt?

current and quick

current ratio

measuring a company's ability to cover short-term obligations (due within one year) using its total current assets

current assets / current liabilities

higher = better

quick ratio

measres a company’s ability to pay short term liabilities with its most liquid assest excluding inventory

current assest - inventories / current liabilities

asset management ratios-purpose and categories

4 ratios - inventory turnover, fixed asset turnover, total asset turnover, dso

are we getting enough sales out of what we own?

Inventory Turnover

how many times per year does the company sell through its inventory?

COGS / inventories

higher = better

DSO

how many days to collect cash after a sale?

accounts receivable / (annual sales / 365)

lower = better

Fixed assets turnover

how much sales does the company generate per dollar of fixed assets?

sales / net fixed assets

higher = better

Total assets turnover

how much sales does the company generate per dollar of all assets?

sales / total assets

higher = better

debt management ratio-purpose and categories

what is owed vs is what the company owes?

2 ratios- debt to capital, tie

debt to capital

what percentage of company is funded by debt?

total debt / (total debt + total equity)

lower = less risk

times interest earned (TIE)

how many times can the company cover its interest payment with its operating income?

EBIT/Interest expense

higher = safer

total debt formula

notes payable + long term debt

profitability ratios-purpose and categories

is money being made relative to sales and assets?

5 ratios- operating margin, profit margin, BEP, ROA, ROE

operating margin

how much operating profit does the company mae per dollar of sales?

EBIT / sales

Profit margin

how much net profit after all expenses per dollar of sales?

net income / sales

basic earning power (BEP)

how much operating income does the company generate per dollar of assets?

EBIT / total assets

return on assets (ROA)

how much profit does the company generate per dollar of assets?

net income / total assets

return on equity (ROE)

how much profit does the company generate per dollar of shareholder equity?

net income / total equity

marhet value ratios

market perception

2 ratios

prices to earnings ratios (PIE)

how much are investors willing to pay for every dollar of earnings?

stock price / earnings per share

higher = investors expect more growth

market to book

how much are investors willing to pay for every dollar of book values?

stock price / book value per share

high = confident investors

book value per share

total equity / shares outstanding