D775 WGU Section 2

Liquidity Ratios

measure a company's ability to meet its short-term financial obligations using its most liquid assets

High liquidity ratios

indicate a strong capacity to cover short-term debts, enhancing the firm's creditworthiness and financial stability.

Low liquidity ratios

This might indicate that a company may have a problem with paying its bills.

Activity Ratios

sometimes called efficiency ratios—evaluate how efficiently a firm utilizes its assets to generate sales or revenue.

Leverage ratios

measure the extent to which a firm uses debt to finance its operations and growth

Profitability Ratios

assess a company's ability to generate earnings relative to its revenue, assets, or equity.

Market Ratios

Analyze a company's financial performance in relation to its stock price.

lower activity ratios

these companies might have "stale" assets, or assets that do not generate sources of revenue.

higher activity ratios

efficient management of assets generally Leads to higher profitability and better cash flow.

capital structure

The company's structure or mixture of debt and equity—and its reliance on external funding

higher leverage ratio

Indicate greater financial risk, as the company might struggle to meet its debt obligations during economic downturns

moderate leverage ratio

can enhance returns on equity when managed properly.

Higher profitability ratios

Typically suggest a well-managed company with effective cost control and strong revenue-generating capabilities.

Unfavorable market ratios

sometimes indicate that a company might be overvalued by market participants.

Favorable market ratio

generally reflect positive investor sentiment and confidence in the company's future performance.

cross-sectional analysis

compare the financial ratios of one firm to the same ratios of another firm

time-series analysis

examine the financial ratios of one firm across time.

Financial statements

files or documents that provide a comprehensive snapshot of a company's performance and operational efficiency.

Balance Sheet

presents a company's financial position at a specific point in time.

Assets

resources owned by the company that have economic value.

current assets

cash, inventories, receivables

fixed assets

property, plant, and equipment, or PP&E

Liabilities

company's obligations to third parties

Current Liabilities /short-term liabilities

company's obligations to third parties-due within one year

long-term liabilities

company's obligations to third parties-due after one year

Shareholders’ Equity

The owners' claim on the company's assets after all liabilities have been settled. It includes paid-in capital, retained earnings, and treasury stock.

Total Assets

simply the sum of current and fixed assets

Total Liabilities

sum of the current liabilities and long-term debt

income statement

profit and loss statement, outlines the company's financial performance over a specific period, usually a month, quarter, or year

Total Equity

The difference between total assets and total liabilities

revenue

the income generated from normal business operation

Cost of goods sold (COGS)

the direct costs attributable to the production of goods sold by the company—including selling, general, and administrative expenses (SG&A) as well as research and development (R&D)

Earnings before interest and taxes (EBIT)

equal to revenue minus COGS, SG&A, and R&D, expenses minus depreciation.

Earnings before taxes (EBT)

EBIT minus paid interest

Net income

The profit after all expenses, taxes, and interest have been deducted from total revenue

Depreciation

a non-cash expense that represents the gradual reduction in the value of a company's fixed assets over time.

current ratio

measures a company's ability to satisfy its short-term liabilities with its short-term assets one or higher generally indicates that a company has sufficient assets to meet its short-term obligations, with higher values suggesting greater liquidity. A value less than one indicates that the company may struggle to meet its short-term liabilities

agency costs

costs that are incurred by the firm when management and employees of a company do not act in the best interests of shareholders.

Quick Ratio (Acid Test Ratio)

assesses a company's ability to fulfill its short-term obligations without relying on the sale of inventory-above one is desirable, indicating strong liquidity without depending on inventory liquidation

Cash Ratio

This ratio focuses strictly on a company's most liquid assets, providing insight into its ability to pay off short-term liabilities with its cash on hand.

higher cash ratio

indicates a stronger position to cover short-term debts immediately, reflecting higher financial stability.

lower cash ratio

less liquidity and, perhaps, more difficulty in meeting short-term liabilities.

Average Collection Period

the number of days it takes on average for the company to collect its receivables

Accounts receivable (A/R) turnover

The number of times a firm's A/R account turns over, or is paid off, per year.-

lower A/R turnover

indicates that the company may be struggling to collect its receivables

Higher A/R Turnover

indicates that the company is able to collect its receivables more often

Inventory Turnover

the number of times it turns (or sells) its inventory annually.

Total Asset Turnover Ratio

How efficiently a company uses all its assets to generate revenue or sales

higher total asset turnover ratio

implies that the company is effectively using its assets to produce revenue,

lower total asset turnover ratio

indicate underutilization of assets

fixed asset turnover ratio

a company's fixed assets, such as property, plant, and equipment (PP&E), and how effectively these assets contribute to generating sales.

higher fixed asset turnover ratio

suggests that the company is efficiently using its fixed assets to generate sales, which is particularly relevant in capital-intensive industries.

low turnover ratios

might reflect inefficient use of resources or poor sales performance, signaling a need for operational improvements.

leverage ratio

can be thought of as debt financing—and its ability to manage and service its debt

debt-to-assets (D/A) ratio

Measures the percentage of a company's assets that are financed by debt.

debt-to-equity (D/E) ratio

compares the company's total debt to its equity and offers insight into how a company finances its operations and growth

high D/E ratio

indicate that a company is aggressively using debt to fuel growth, which could result in higher earnings volatility. -increases the risk of financial distress if the company cannot generate sufficient returns on its debt

Low D/E Ratio

suggests a reliance on equity financing, which might signify lower risk but also reflects on the company's conservative growth strategies.

Times-Interest-Earned (TIE) Ratio

compares company operating profit, or EBIT, to paid interest.-

it tells us how many times a company covers (or could pay) the interest on its debt given its earnings.

Return on assets (ROA)

indicates how effectively management uses the company's assets to produce profits

Return on equity (ROE)

provides a direct measure of the company's return from the equity that exists on the balance sheet.-reveals how well a company uses equity financing to grow its profits

Profit margin

sometimes called "net margin," provides insight into the portion of revenue that remains as net income after all expenses are deducted.

Operating Margin

how much of total revenue is kept after paying cost of goods sold (COGS) and depreciation.

Book Value

the literal value or face value of an asset

market value

the value that others are willing to pay for the asset.

Price-Earnings Ratio (P/E)

The market price of a stock relative to its net income or earnings.

lower P/E ratios

generally considered to be stocks that are cheaper.

Return on Assets (ROA)

A type of profitability ratio that measures how efficiently a company utilizes its assets to generate net income

Return on Equity (ROE)

A type of profitability ratio that gauges the profitability generated from shareholders' equity

Accounts Receivable (A/R) Turnover

A type of liquidity ratio that describes the number of times a firm's accounts receivable account is paid off

Fixed Asset Turnover Ratio

A type of activity ratio that evaluates how effectively fixed assets contribute to generating sales

Average Collection Period

A type of liquidity ratio that calculates the average number of days it takes for a company to collect its receivables

Debt-to-Equity Ratio (D/E)

A type of leverage ratio that compares the company's total debt to its equity

Debt-to-Assets Ratio (D/A)

A type of leverage ratio that measures the percentage of a company's assets that are financed by debt

Cash Ratio

A type of liquidity ratio that provides insight into a company's ability to pay off short-term liabilities with its cash on hand

Current Ratio

A type of liquidity ratio that measures a company's ability to satisfy its short-term liabilities with its short-term assets

Price-Earnings Ratio (P/E)

A type of market ratio that measures the market price of a stock relative to its net income or earnings