CF - Chapter 3

common size statement

A standardized financial statement presenting all items in percentage terms. Balance sheet items are shown as a percentage of assets and income statement as a percentage of sales.

current ratio (short term solvency or liquidity measures)

current ratio = current assets/ current liabilities

quick ratio (short term solvency or liquidity measures)

(current assets - inventory)/ current liabilities

short term solvency or liquidity measures

firm’s ability to pay its bills over the short run without undue stress

cash ratio (liquidity measure)

cash / current liabilities

long term solvency measures

address the firm’s long-run ability to meet its obligations

total debt ratio (long term solvency measures)

(total assets - total equity)/ total assets

cash coverage (long term solvency measures)

(EBIT + Depreciation)/interest

times interest earned (long term solvency measure)

EBIT / Interest

asset management or turnover measures

how efficiently or intensively a firm uses its assets to generate sales

inventory turnover

costs of goods sold/ inventory

days sales in inventory

365/inventory turnover

receivables turnover

sales/accounts receivable

days sales in receivables

365/receivables turnover

total asset turnover

sales/total assets

profitability measures

intended to measure how efficiently the firm uses its assets and how efficiently the firm manages its operations

profit margin

net income/sales

return on assets

net income/ total assets

return on equity

net income/total equity

earnings per share

net income/ shares outstanding

price earnings ratio

price per share/earnings per share

price-sales ratio

price per share/sales per share

market to book ratio

market value per share/book value per share

enterprise value

total market value of stock + book value of all liabilities

EBITDA ratio

enterprise value/EBITDA

DuPont Identity

Popular expression breaking ROE into three parts: operating efficiency, asset use efficiency, and financial leverage

(net income/sales)*(sales/assets)*(assets/total equity)

profit margin total asset turnover equity multiplier

ROE is affected by operating efficiency, asset use efficiency, financial leverage

dividend payout ratio

cash dividends/net income

retention ratio

addition to retained earnings/net income

internal growth rate

(ROA b)/1-ROA *b

sustainable growth ratee

(ROE *b) / 1 - ROE *b

Standard Industrial Classification Code

U.S. government code used to classify a firm by its type of business operations.