Ratio Analysis and Interpretation Vocabulary

Vocabulary flashcards generated from lecture notes covering ratio analysis, performance indicators, liquidity, stability, profitability, market ratios, efficiency, and investment strategies.

Ratio Analysis

Looking at the relationship that exists between two different quantities to determine the performance and health of a business.

5 Areas of Ratio Analysis

Liquidity, Stability/leverage, Market, Efficiency, and Profitability.

KPI

Indicators/benchmarks used to measure performance and help evaluate success in achieving goals.

Liquidity Ratios

Measures how easily an asset is convertible into cash and the ability of the business to pay short term debts as it falls due.

Current Ratio

A liquidity ratio measuring the ability to pay short term debts using current assets.

Window Dressing

A practice used to improve the current ratio by paying creditors just before the preparation of the balance sheet (B/S).

Quick Ratio

A liquidity ratio measuring the ability to pay short term debts using more liquid assets.

Stability Ratios

Ratios used to measure medium to long term survival prospects and financial risk.

Debt to Equity Ratio

A stability ratio that measures the level of debt financing (external) to equity financing (internal) and medium to long term survival prospects.

Highly Geared

A condition where a business has a Debt to Equity Ratio of more than 100%.

Times Interest Earned Ratio

A stability ratio measuring the number of times interest is covered by profit before tax, where 3 to 4 is considered a good safety margin.

Profitability Ratios

Ratios that measure the success of a business in making profits.

Profit Margin Ratio

A profitability ratio showing the amount of profit contained in each dollar ($) of sales.

Rate Of Return on Assets Ratio

A profitability ratio measuring how efficiently a business used assets to generate profit.

Market Ratios

Ratios that assess share value, investor return, and market perceptions.

Earnings per Share Ratio

A market ratio showing the profit earned on each ordinary share.

Price to Earnings Ratio

A market ratio showing the number of times the profit per ordinary share investors are prepared to pay for a share (stock market's assessment of ordinary shares).

Dividend Yield Ratio

A market ratio measuring current return (dividend received) to an investor on buying a share on the stock market.

Efficiency Ratios

Ratios measuring the effectiveness of policies used by a business to manage inventory and collect money from debtors.

Debtors' Collection Period

An efficiency ratio measuring the number of days it takes to collect money from debtors for credit sales.

Inventory Turnover

An efficiency ratio measuring how many times each year a business replaces its inventory.

Diversification

An important investment principle involving spreading risk by investing in several companies across a range of industries rather than putting all money into one company.