Finance – Chapter Three

Four Primary Categories of Ratios 1. Profitability Ratios2. Asset Utilization Ratios3. Liquidity Ratios4. Debt Utilization Ratios
Profitability Ratios (Types) 1. profit margin2. return on assets (investment)3. return on equity
Asset Utilization Ratios (Types) 4. receivable turnover5. average collection period6. inventory turnover7. fixed asset turnover8. total asset turnover
Liquidity Ratios (Types) 9. current ratio10. quick ratio
Debt Utilization Ratios (Types) 11. debt to total assets12. times interest earned13. fixed charged coverage
Profitability Ratios – allows us to measure the ability of the firm to earn an adequate return on sales, total assets, and invested capital
Asset Utilization Ratios – measures the speed at which the firm is turning over accounts receivable, inventory, and longer-term assets- measure how many times per year a company sells its inventory or collects all of its accounts receivable- for long-term assets, the utilization ratio tells us how productive the fixed assets are in terms of generating sales
Liquidity Ratios – the primary emphasis moves to the firm’s abilities to pay off short-term obligations as they come due
Debt Utilization Ratios – the overall debt position of the firm is evaluated in light of its asset base and earning power
Profit Margin Ratio net income divided by sales
Return on Assets (Investment) net income divided by total assets
Return on Equity net income divided by stockholder’s equity
Du Pont System of Analysis return on assets (investment) = profit margin x asset turnover
Receivables Turnover sales (credit) divided by receivables
Average Collection Period accounts receivable divided by average daily credit sales
Inventory Turnover sales divided by inventory
Fixed Asset Turnover sales divided by fixed assets
Total Asset Turnover sales divided by total assets
Current Ratio current assets divided by current liabilities
Quick Ratio current assets minus inventory divided by current liabilities
Debt To Total Assets total debt divided by total assets
Times Interest Earned income before interest and taxes divided by interest- indicates the number of times that income before interest and taxes covers the interest obligation
Fixed Charge Coverage income before fixed charges and taxes divided by fixed charges – measures the firms ability to meet all fixed obligations rather than interest payments alone
Trend Analysis an analysis of performance that is made over a number of years in order to ascertain significant patterns
Inflation prices increasing with the passing of time
Replacement Cost – the cost of replacing the existing asset base at current prices as opposed to original cost

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