FMAA™ > Financial Ratios Overview > Flashcards

Financial Ratios Overview Flashcards

Learn how to calculate and interpret liquidity, leverage, activity, and profitability ratios. (43 cards)

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1
Q

What is the formula for the current ratio?

A

Current Assets / Current Liabilities

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2
Q

What does a current ratio below 2:1 indicate?

A

Possible liquidity problem.

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3
Q

What is the quick ratio also known as?

A

Acid Test Ratio

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4
Q

What assets are included in the quick ratio?

A
  • Cash & Cash Equivalents
  • Marketable Securities Classified as Current Assets
  • Net Accounts Receivable
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5
Q

Why is inventory excluded from the quick ratio?

A
  • Inventory requires replacement with cash
  • Inventory is less liquid than accounts receivable
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6
Q

What is the standard for the quick ratio?

A

1:1

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7
Q

What is the formula for the cash ratio?

A

(Cash & Cash Equivalents + Marketable Securities Classified as Current Assets) / Current Liabilities

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8
Q

What does the cash flow ratio measure?

A

How many times greater the cash flow generated by operations is than current liabilities

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9
Q

What is the standard for a healthy cash flow ratio?

A

0.40 or higher

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10
Q

What is net working capital?

A

Current Assets - Current Liabilities

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11
Q

What is the formula for the debt to equity ratio?

A

Total Liabilities / Total Equity

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12
Q

What does a debt to equity ratio of 2:1 mean?

A

The company’s total debt is twice its total equity.

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13
Q

What is the formula for the long-term debt to equity ratio?

A

(Total Debt - Current Liabilities) / Total Equity

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14
Q

What does the debt to total assets ratio measure?

A

The proportion of the company’s total assets that are financed by creditors.

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15
Q

What is the formula for the interest coverage ratio?

A

Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense

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16
Q

What is considered an excellent interest coverage ratio?

A

Greater than 3.0

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17
Q

What do activity ratios provide information about?

A
  • A firm’s ability to efficiently manage its current assets.
  • A firm’s ability to effectively manage its accounts payable.
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18
Q

What does the accounts receivable turnover ratio measure?

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A
  • The number of times receivables turn over during a year
  • The efficiency of a firm’s accounts receivable collections efforts
  • The amount of investment in receivables needed to maintain sales
19
Q

How is the accounts receivable turnover ratio calculated?

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A

Net Annual Credit Sales / Average Gross Accounts Receivable

20
Q

What does an increase in the accounts receivable turnover ratio indicate?

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A

Receivables are being collected more rapidly.

21
Q

What is the days’ sales in receivables also known as?

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A

Average Collection Period

22
Q

How can the days’ sales in receivables be calculated?

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A
  • 365 / Accounts Receivable Turnover Ratio
  • 365 × Average Gross Accounts Receivable / Net Annual Credit Sales
  • Average Gross Accounts Receivable / Average Daily Net Credit Sales
23
Q

What does the inventory turnover ratio indicate?

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A

How many times during the year the company sells its average level of inventory and replaces it with new inventory

24
Q

How is the inventory turnover ratio calculated?

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A

Annual Cost of Goods Sold (COGS) / Average Inventory

25
What does the **days’ sales in inventory** represent?
The **average number of days** that inventory items **remain in stock** before being sold.
26
How can the days’ sales in **inventory** be **calculated**?
* 365 / Inventory Turnover Ratio * 365 × Average Inventory / Annual COGS * Average Inventory / Average Daily COGS
27
What does the **accounts payable turnover ratio** represent?
* The number of times payables turn over during a year. * The speed with which the company pays its suppliers.
28
How is the accounts payable turnover ratio **calculated**?
Annual Credit Purchases / Average Accounts Payable
29
What does a **decrease** in the accounts payable turnover ratio over time indicate?
The company is paying its payables **more slowly**, indicating possible **liquidity problems**.
30
What does the **total asset turnover ratio** measure?
The **amount of sales revenue** generated from the use of each currency unit invested in **average total assets**.
31
How is the total asset turnover ratio **calculated**?
Sales / Average Total Assets
32
What does the **fixed asset turnover ratio** measure?
The **amount of sales revenue** generated from each currency unit invested in **net fixed assets**.
33
How is the fixed asset turnover ratio **calculated**?
Sales / Average Net Property, Plant, and Equipment
34
What is the **gross profit margin** percentage?
The percentage of sales revenue available to **cover expenses** other than cost of sales.
35
How is the gross profit margin percentage **calculated**?
Gross Profit / Net Sales Revenue
36
What does the **operating profit margin percentage** measure?
How much of its **net sales revenue** the firm keeps as **operating income**.
37
How is the operating profit margin percentage **calculated**?
Operating Income / Net Sales Revenue
38
What does the **net profit margin percentage** measure?
The percentage of **sales revenue that becomes profit**.
39
How is the net profit margin percentage **calculated**?
Net Income / Sales Revenues
40
What does **return on assets** measure? | (ROA)
How much **return** the company **earns on the capital invested** in its assets.
41
How is return on assets (ROA) **calculated**?
Income / Average Total Assets
42
What does **return on equity** measure? | (ROE)
The **return** the business **receives on the stockholders’ equity** invested in the business.
43
How is return on equity (ROE) **calculated**?
Income / Average Equity
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