finance exam 1

OCF- Operating Cash Flow

EBIT + Depreciation - taxes

OCF using tax rate

OCF= EBIT (1- tax rate) + depreciation

Cash flow from assets

CFA= OCF - NCS - change in NWC

Net capital spending

Ending net fixed assets - beginning net fixed assests + Depreciation

Change in net wokring capital

find current assets (Last yr - This yr)

Find current liabilities (Last yr - This yr)

Then do current NWC - Last yr NWC

Quick ratio

current assets-inventory/current liabilities

inventory turnover

COGS/Inventory

Receivables turnover and Days Sales in receivables

Receivable turn over: sales/accounts receivable

Days Sales in Receivables: 365/receivable solution

Basic earning power BEP

EBIT/Total assets

Asset turnover

sales/assets

equity multiplier

Assets/Equity

ROE

Net income/equity

what is liquidity

A firm’s ability to meet short term obligations, higher is generally better

Why is quick ratio more conservative than the current ratio?

Because inventory is excluded and inventory is usually the least liquid current asset

What does BEP measure

Operating profitability before interest and taxes

What is financial leverage

The use of debt financing to acquire assets

return on equity ROE

measures how much profit the company’s owners earn on their investment

profit margin

net income/sales

measures how much profit is generated from sales

How can ROE increase?

there are only three ways: increase profit margin (ex: raise prices), Increase Asset turnover (Ex: Increase sales), Increase equity multiplier (Ex: borrow more money but higher leverage can increase ROE but increase risk as well)