Financial Ratio Analysis – Key Vocabulary

30 vocabulary flashcards summarize categories, individual ratios, analytical purposes, and user groups involved in financial ratio analysis.

Financial Ratio Analysis

The systematic process of calculating and interpreting quantitative relationships derived from a firm’s financial statements, such as the balance sheet, income statement, and cash flow statement. This analysis is crucial for evaluating a company's past performance, current financial position, and future prospects, aiding in informed decision-making for various internal and external stakeholders.

Liquidity Ratios

A category of financial ratios designed to assess a company's immediate ability to meet its short-term financial obligations. These ratios indicate the ease and speed with which current assets can be converted into cash to cover current liabilities.

Current Ratio

Liquidity Ratio

Formula for Current Ratio

\frac{\text{Current Assets}}{\text{Current Liabilities}}

Acid-Test (Quick) Ratio

Liquidity Ratio

Formula for Acid-Test (Quick) Ratio

\frac{(\text{Current Assets} - \text{Inventories})}{\text{Current Liabilities}}

Cash Ratio

Liquidity Ratio

Formula for Cash Ratio

\frac{(\text{Cash} + \text{Cash Equivalents})}{\text{Current Liabilities}}

Operating Cash-Flow Ratio

Liquidity Ratio

Formula for Operating Cash-Flow Ratio

\frac{\text{Operating Cash Flow}}{\text{Current Liabilities}}

Leverage Ratios

A group of financial metrics that evaluate the extent to which a company's assets and operations are financed by debt. These ratios help assess a firm's risk profile, its ability to meet long-term obligations, and its reliance on borrowed capital versus equity.

Debt Ratio

Leverage Ratio

Formula for Debt Ratio

\frac{\text{Total Liabilities}}{\text{Total Assets}}

Debt-to-Equity Ratio

Leverage Ratio

Formula for Debt-to-Equity Ratio

\frac{\text{Total Liabilities}}{\text{Shareholders’ Equity}}

Interest Coverage Ratio

Leverage Ratio

Formula for Interest Coverage Ratio

\frac{\text{Operating Income}}{\text{Interest Expenses}}

Debt Service Coverage Ratio (DSCR)

Leverage Ratio

Formula for Debt Service Coverage Ratio (DSCR)

\frac{\text{Operating Income}}{\text{Total Debt Service}}

Efficiency (Activity) Ratios

A set of financial metrics designed to gauge how effectively a company utilizes its assets and resources to generate sales, manage inventory, or collect receivables. These ratios are crucial for highlighting operational strengths and identifying specific areas for improvement in a firm's resource management and operational productivity.

Asset Turnover Ratio

Efficiency (Activity) Ratio

Formula for Asset Turnover Ratio

\frac{\text{Net Sales}}{\text{Average Total Assets}}

Inventory Turnover Ratio

Efficiency (Activity) Ratio

Formula for Inventory Turnover Ratio

\frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}

Accounts Receivable Turnover Ratio

Efficiency (Activity) Ratio