FINA 4200 Exam 1 Formula Definitions

Vocabulary practice flashcards covering financial formulas, metrics, definitions, and forecasting tools for FINA 4200 Exam 1.

Current ratio

Calculated as $\frac{\text{Current assets}}{\text{Current liabilities}}$, it measures the dollars of short-term assets available for every dollar of bills coming due within a year.

Quick ratio (acid test)

Calculated as $\frac{\text{Current assets} - \text{Inventory}}{\text{Current liabilities}}$, it measures short-term liquidity with inventory removed because inventory is the least liquid current asset.

Inventory turnover

Calculated as $\frac{\text{COGS}}{\text{Inventory}}$, it measures how many times per year a firm sells through its entire stock of inventory.

Sales-to-inventory

Calculated as $\frac{\text{Sales}}{\text{Inventory}}$, it measures inventory stock relative to sales revenue rather than cost of goods sold.

Days sales outstanding (DSO)

Calculated as $\frac{\text{Receivables}}{\frac{\text{Annual sales}}{365}}$, it measures the average number of days of sales sitting uncollected in receivables.

Fixed asset turnover

Calculated as $\frac{\text{Sales}}{\text{Net fixed assets}}$, it measures sales generated per dollar of plant and equipment.

Total assets turnover

Calculated as $\frac{\text{Sales}}{\text{Total assets}}$, it measures sales generated per dollar of total assets owned and serves as the second term of the Du Pont equation.

Liabilities-to-assets ratio

Calculated as $\frac{\text{Total liabilities}}{\text{Total assets}}$, it measures the share of the asset base funded by every kind of liability, including payables and accruals.

Debt ratio

Calculated as $\frac{\text{Total debt}}{\text{Total assets}}$, it measures the share of total assets funded specifically by interest-bearing debt (notes payable plus long-term bonds).

Times interest earned (TIE)

Calculated as $\frac{\text{EBIT}}{\text{Interest charges}}$, it measures how many times over a firm's operating profit covers its interest bill.

EBITDA coverage

Calculated as $\frac{\text{EBITDA} + \text{Lease payments}}{\text{Interest} + \text{Principal payments} + \text{Lease payments}}$, it measures coverage of all fixed financing obligations with depreciation added back to earnings.

Profit margin on sales

Calculated as $\frac{\text{Net income available to common}}{\text{Sales}}$, it measures cents of profit per dollar of sales after operating costs, interest, and taxes.

Basic earning power (BEP)

Calculated as $\frac{\text{EBIT}}{\text{Total assets}}$, it measures the raw earning power of the asset base before interest and taxes, providing a financing-neutral comparison.

Return on total assets (ROA)

Calculated as $\frac{\text{Net income available to common}}{\text{Total assets}}$, it measures profit earned per dollar of assets after all financing costs and taxes.

Return on common equity (ROE)

Calculated as $\frac{\text{Net income available to common}}{\text{Common equity}}$, it measures the return shareholders earned on the capital they supplied.

Earnings per share (EPS)

Calculated as $\frac{\text{Net income to common}}{\text{Shares of common equity}}$, it measures accounting profit attributable to each share outstanding.

Price / earnings (P/E)

Calculated as $\frac{\text{Price per share}}{\text{Earnings per share}}$, it measures how many dollars investors pay for one dollar of current earnings.

Market / book (M/B)

Calculated as $\frac{\text{Market price per share}}{\text{Book value per share}}$, it measures how much investors pay for each dollar shareholders originally invested.

Net operating working capital (NOWC)

Calculated as $\text{Operating current assets} - \text{Operating current liabilities}$, it represents short-term capital tied up in operations.

Total net operating capital

Calculated as $\text{NOWC} + \text{Net fixed assets}$, it represents all short-term and long-term capital investors have supplied to run the business.

NOPAT

Calculated as $\text{EBIT} \times (1 - \text{Tax rate})$, it represents after-tax operating profit assuming the firm had no debt at all.

Net cash flow

Calculated as $\text{Net income} - \text{Non-cash revenues} + \text{Non-cash charges}$ (typically $\text{Net income} + \text{Depreciation}$), it measures cash generated after correcting accrual accounting.

Free cash flow (FCF)

Calculated as $\text{NOPAT} - \text{Net investment in operating capital}$, it represents cash available for distribution to all investors after funding needed operating capital.

Return on invested capital (ROIC)

Calculated as $\frac{\text{NOPAT}}{\text{Total operating capital}}$, it measures after-tax operating profit per dollar of capital tied up in operations.

Economic value added (EVA)

Calculated as $\text{NOPAT} - (\text{WACC} \times \text{Operating capital})$, it measures true economic profit after charging for the cost of all capital, including equity.

Market value added (MVA)

Calculated as $(\text{Shares outstanding} \times \text{Stock price}) - \text{Total common equity}$, it measures the cumulative difference between market equity value and contributed equity.

Equity multiplier

Calculated as $\frac{\text{Total assets}}{\text{Common equity}}$, it measures financial leverage by indicating dollars of assets controlled per dollar of equity.

Du Pont equation

Calculated as $\text{ROE} = \text{Profit margin} \times \text{Total assets turnover} \times \text{Equity multiplier}$, it decomposes ROE into operating efficiency, asset use efficiency, and financial leverage.

AFN equation

Calculated as $\text{AFN} = \left(\frac{A^*}{S_0}\right) \times \Delta S - \left(\frac{L^*}{S_0}\right) \times \Delta S - S_1 \times M \times (1 - \text{POR})$, it measures additional outside funds needed to support forecast sales growth.

Financing deficit or surplus

Calculated as $\text{Total required assets} - \text{Specified sources of financing}$, it measures the forecasted financial statement gap remaining after counting specified sources of financing.