Chapter 3 Vocabulary: Financial Statements and Ratios

A set of vocabulary-style flashcards covering standardized financial statements, common-size statements, ratio analysis, growth concepts (internal and sustainable), DuPont identity, and key liquidity, efficiency, leverage, profitability, and market-value ratios.

Standardized financial statements

Statements adjusted for comparison by expressing balance sheet items as a percentage of total assets and income statement items as a percentage of sales, enabling year-to-year and cross-company comparisons.

Common-size balance sheet

A balance sheet in which each account is presented as a percentage of total assets.

Common-size income statement

An income statement in which each item is presented as a percentage of sales.

DuPont Identity

A decomposition of ROE into three components: Profit Margin, Total Asset Turnover, and Equity Multiplier.

Profit Margin

Net income divided by sales; measures operating efficiency.

Total Asset Turnover

Sales divided by total assets; indicates how efficiently assets generate sales.

Equity Multiplier

Total assets divided by total equity; reflects financial leverage.

ROE (Return on Equity)

Net income divided by total equity; measure of how effectively equity is used to generate earnings.

Internal growth rate

Maximum growth in assets achievable using retained earnings only (no external financing).

Sustainable growth rate

Maximum growth achievable while maintaining a constant debt ratio, using internal funds and debt.

Dividend payout ratio

Dividends divided by net income; portion of earnings paid to shareholders as dividends.

Retention ratio (b)

1 minus the dividend payout ratio; portion of earnings retained for reinvestment.

Price-earnings ratio (P/E)

Market price per share divided by earnings per share (EPS).

Market-to-book ratio

Market value per share divided by book value per share; or total market value of equity divided by book value of equity.

Earnings per share (EPS)

Net income divided by shares outstanding.

Enterprise value

Total market value of equity plus total debt minus cash.

EBITDA

Earnings before interest, taxes, depreciation, and amortization (EBITDA = EBIT + Depreciation + Amortization).

EBITDA ratio

EBITDA divided by Enterprise Value (EBITDA/EV) to assess operating performance relative to firm value.

Current ratio

Current assets divided by current liabilities; measures short-term liquidity.

Quick ratio

(Current assets − Inventory) divided by current liabilities; a stricter liquidity measure.

Cash ratio

Cash and cash equivalents divided by current liabilities; most stringent liquidity measure.

Inventory turnover

Cost of goods sold divided by average inventory; rate at which inventory is sold.

Days' Sales in Inventory

365 divided by Inventory turnover; average number of days to sell inventory.

Receivables turnover

Sales divided by average accounts receivable; measures how quickly receivables are collected.

Days' Sales in Receivables

365 divided by receivables turnover; average collection period.

Payables turnover

Cost of goods sold divided by average accounts payable; measures how quickly payables are paid.

Days' Costs in Payables

365 divided by payables turnover; average time to pay suppliers.

Total debt ratio

Total liabilities divided by total assets; measures financial leverage.

Debt-to-equity ratio

Total debt divided by total equity; another measure of financial leverage.

Times interest earned

EBIT divided by interest expense; capacity to meet interest obligations.

Cash coverage

(EBIT + Depreciation) divided by interest; broader measure of interest coverage.

ROA (Return on Assets)

Net income divided by total assets; measure of asset-use efficiency.

Capital intensity ratio

Total assets divided by sales; reciprocal of asset turnover, reflecting asset usage.