Ratio Analysis Lecture Flashcards

This set of vocabulary flashcards covers key financial ratios including liquidity, solvency, profitability, and stock market ratios as defined in the Brickey Electronics lecture notes.

Ratio Analysis

The study of various relationships between different items reported in a set of financial statements.

Liquidity Ratios

Ratios that indicate a company’s ability to pay short-term debts by focusing on current assets and current liabilities.

Working Capital

The difference between a company’s current assets and current liabilities, ensuring whether a business has sufficient cash flow to meet short-term obligations and operating expenses; calculated as $\text{Current assets} - \text{Current liabilities}$.

Current Ratio

A measure of a company's ability to pay short-term and long-term obligations; a ratio less than $1:1$ indicates insolvency. Formula: \text{Current Assets} \textdiv \text{Current Liabilities}.

Acid-Test (Quick) Ratio

A measure of how well a company can meet short-term financial liabilities using only assets readily convertible into cash, excluding inventory. Formula: (\text{Cash} + \text{Marketable securities} + \text{Current receivables}) \textdiv \text{Current Liabilities}.

Accounts Receivable Turnover

Measures how effective a company is in extending credit and collecting debts by calculating the number of times average accounts receivable is collected over a period. Formula: \text{Sales on Account} \textdiv \text{Average Accounts Receivable Balance}.

Average Collection Period

The average number of days it takes for a company to collect a credit sale. Formula: 365\text{ days} \textdiv \text{Accounts Receivable Turnover}.

Inventory Turnover

Measures how many times average inventory is replaced or sold during a period, showing how easily a company turns inventory into cash. Formula: \text{Cost of Goods Sold} \textdiv \text{Average Inventory Balance}.

Average Sale Period

The average number of days it takes for a company to sell its inventory. Formula: 365\text{ days} \textdiv \text{Inventory Turnover}.

Solvency Ratios

Used to analyze a company’s long-term debt-paying ability and its financing structure.

Debt to Asset Ratio

Measures the amount of total assets financed by creditors compared to investors, showing the percentage of resources funded by borrowing. Formula: \text{Total Liabilities} \textdiv \text{Total Assets}.

Debt to Equity Ratio

Shows the percentage of company financing that comes from creditors versus investors; a higher ratio indicates more creditor financing (bank loans) is used. Formula: \text{Total Liabilities} \textdiv \text{Total Equity}.

Number of Times Interest Earned

A coverage ratio measuring the proportionate amount of income available to cover interest expenses in the future. Formula: \text{Income before Interest and Taxes} \textdiv \text{Interest Expense}.

Long-term Debt to Assets Ratio

Measures the percentage of assets a business would need to liquidate to pay off its long-term debt. Formula: \text{Long-Term Debt} \textdiv \text{Total Assets}.

Plant Assets to Long-term Liabilities

Measures the extent to which a company's property, plant, and equipment can cover its long-term obligations, indicating protection for long-term creditors. Formula: \text{Net Plant Assets} \textdiv \text{Long-term Liabilities}.

Profitability Ratios

Ratios used to measure a company’s ability to generate earnings.

Return on Total Assets (ROA)

Measures how efficiently a company uses total assets to generate profit. Formula: $\frac{\text{Net Income} + [\text{Interest Expense} \times (1 - \text{Tax Rate})]}{\text{Average Total Assets}}$.

Return on Common Stockholder’s Equity (ROE)

Reflects the return earned by owners on their equity in the business. Formula: $\frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Average Common Stockholder’s Equity}}$.

Asset Turnover Ratio

Indicates the number of pesos in sales produced for every peso invested in assets. Formula: \text{Net Sales} \textdiv \text{Average Total Assets}.

Return on Sales (Net Margin)

Measures the percentage of net income generated from sales revenue after covering all expenses. Formula: \text{Net Income} \textdiv \text{Net Sales}.

Stock Market Ratios

Ratios used to analyze the earnings and dividends of a company.

Earnings Per Share (EPS)

Measures the amount of net income earned for each outstanding share of common stock. Formula: $\frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Average number of common shares outstanding}}$.

Book Value Per Share (BVPS)

Measures the owner’s equity attributable to each outstanding share of stock based on accounting records. Formula: $\frac{\text{Total Stockholder’s Equity} - \text{Preferred Stocks}}{\text{Number of common shares outstanding}}$.

Price-Earnings (P/E) Ratio

Measures how much investors are willing to pay for every peso of earnings generated. Formula: \text{Market Price per Share} \textdiv \text{Earnings per Share}.

Dividend Payout Ratio

The percentage of net income distributed to shareholders as dividends rather than retained. Formula: \text{Dividends per Share} \textdiv \text{Earnings per Share}.

Dividend Yield Ratio

Measures the return shareholders receive in cash dividends relative to the market price of a share. Formula: \text{Dividends per Share} \textdiv \text{Market price per Share}.