Financial Ratio Flashcards

Flashcards for reviewing financial ratios, their calculations, and significance.

Profitability Ratios

Indicates the efficiency with which the operations of a business are carried on.

Overall Profitability Ratio

Also called Return on Investment (ROI) or Return on Capital Employed (ROCE) ratio; indicates the percentage of return on the total capital employed in the business.

ROI (Return on Investment)

Measures the profit a firm earns by investing a unit of capital; expresses all efficiencies or inefficiencies of a business collectively.

Price Earning Ratio (P/E Ratio)

Indicates the number of times the earning per share is covered by the market price.

Gross Profit Ratio (GPR)

Expresses the relationship between Gross Profit and Net Sales.

Significance of Gross Profit Ratio

Indicates the overall limit within which a business must manage its operating expenses and helps ascertain whether the average percentage of mark-up on goods is maintained.

Net Profit Ratio (NPR)

Indicates net margin earned on a sale of 100.

Significance of Net Profit Ratio

Helps in determining the efficiency with which the affairs of a business are being managed.

Operating Ratio

Complementary of net profit ratio; a test of the operational efficiency with which the business has carried on.

Debt Service Coverage Ratio (DSCR)

Indicates the number of times the fixed financial charges are covered by income before interest and tax.

Significance of Debt Service Coverage Ratio

Significant from the lender's point of view; indicates whether the business would earn sufficient profits to pay periodically the interest charges.

Pay-out Ratio

Indicates what proportion of earning per share has been used for paying dividend.

Significance of Pay-out Ratio

An indicator of the amount of earnings that have been ploughed back into the business. A lower pay-out ratio means a stronger financial position of the company.

Dividend Yield Ratio (DYR)

Calculated by comparing the rate of dividend per share with its market value; helps an intending investor in knowing the effective return he is going to get on his investment.

Return on Shareholders funds or Return or Net Worth

Expresses the net profit in terms of the equity shareholders' funds; an important yardstick of performance for equity shareholders.

Turnover Ratios / Activity Ratio

Indicate the efficiency with which capital employed is rotated in the business.

Overall Turnover Ratio

Indicates the number of times the capital employed has been rotated in the process of doing a business.

Fixed Assets Turnover Ratio

Indicates the extent to which the investment in fixed assets has contributed towards sales.

Debtors' Turnover Ratio

Indicates the speed with which money is collected from debtors.

Significance of Debtors' Turnover Ratio or Debt Collection Period Ratio

Measures the quality of debtors since it indicates the speed with which money is collected from the debtor.

Creditors Turnover Ratio

Indicates the speed with which payments for credit purchases are made to creditors.

Significance of Creditors Turnover Ratio and Creditors Payment Period

Indicate the promptness in making payment for credit purchases.

Stock Turnover Ratio

Indicates whether the investment in inventory is efficiently used and whether it is within proper limits.

Significance of Stock Turnover Ratio

Signifies the liquidity of inventory.

Financial Ratios

Also termed as 'Solvency Ratios'; indicate the financial position of the company.

Fixed Assets Ratio

Indicates the extent to which fixed assets have been acquired by the use of long-term funds.

Significance of Fixed Assets Ratio

An index of the concern's financial stability, since it shows the extent to which the company's assets exceed its current liabilities.

Significance of Current Ratio

An index of the concern's ability to meet its current obligations.

Liquidity Ratio / Quick Ratio / Acid Test Ratio

Ascertained by comparing the liquid assets i.e., current assets (excluding stock and prepaid expenses) with current liabilities; an indicator of short-term solvency of the company.

Super-quick Ratio

A slight variation of quick ratio; a rigorous test of a firm's liquidity position.

Defensive-Interval Ratio (DIR)

Denotes the liquidity of a firm in relation to its ability to meet projected daily expenditure from operations.

Debt Service Coverage Ratio (DSCR)

Indicates whether the business is earning sufficient profits to pay not only the interest charged, but also the repayment of the principal amount; a key indicator to the lender.