Chapter 4 Ratio Analysis – Vocabulary Flashcards (Video Notes)

Vocabulary flashcards covering key ratio analysis concepts and terms from the notes.

Current Ratio (CR)

Liquidity measure: Current Assets / Current Liabilities. A CR greater than 1 indicates the firm can cover short‑term obligations.

Quick Ratio (Acid Test)

Liquidity measure excluding inventories: (Current Assets − Inventories) / Current Liabilities.

Inventory Turnover (ITO)

Turnover of inventory: COGS / Inventory. Higher turnover indicates faster inventory usage/selling.

Days Sales Outstanding (DSO)

Average days to collect receivables: Accounts Receivable / Sales × 365.

Fixed Asset Turnover (FAT)

Efficiency in using fixed assets: Sales / Fixed Assets.

Total Asset Turnover (TAT)

Efficiency in using all assets: Sales / Total Assets.

Debt to Capital Ratio

Proportion of capital financed by debt: Total Debt / (Total Debt + Total Equity).

Times Interest Earned (TIE)

Ability to cover interest payments: EBIT / Interest Expense.

Equity Multiplier (EM)

Measurement of financial leverage: Total Assets / Total Equity.

Return on Equity (ROE)

Net Income / Total Equity. Also decomposed by the DuPont identity as PM × ATO × EM.

Return on Assets (ROA)

Net Income / Total Assets. Indicates how efficiently assets generate profits.

Return on Invested Capital (ROIC)

EBIT(1 − Tax) / Invested Capital. Measures return to all investors using EBIT after tax.

Profit Margin (PM)

Net Income / Sales. Indicates profitability per dollar of sales.

Operating Margin

EBIT / Sales. Profitability from operations before interest and taxes.

Price‑to‑Earnings Ratio (P/E)

Market Price per share / Earnings per share. Indicates how much investors will pay per dollar of earnings.

Market to Book Ratio (Market to Book)

Market Value of Equity / Book Value of Equity. Assesses value created beyond accounting book value.

Enterprise Value (EV)

Total value of the firm: Market Value of Equity + Debt − Cash and Cash Equivalents.

EV/EBITDA

Enterprise Value divided by EBITDA. A clean, cross‑firm profitability multiple.

Earnings Per Share (EPS)

Net Income / Shares Outstanding. Indicates how much earnings are allocated to each share.

Dividends Per Share (DPS)

Dividends paid per share: Dividends / Shares Outstanding.

Payout Ratio (POR)

Dividends / Net Income. Fraction of earnings paid out as dividends.

Retention Ratio (RR)

1 − Payout Ratio; portion of earnings retained in the firm.

POR + RR = 1

Fundamental relationship: the payout ratio plus the retention ratio always equals 100% of earnings.

Addition to Retained Earnings

Portion of Net Income added to Retained Earnings after dividends are paid.

EBIT, EBITDA, EBT, NI

EBIT: Earnings Before Interest and Taxes; EBITDA: EBIT + Depreciation/Amortization; EBT: Earnings Before Taxes; NI: Net Income.