| Gross Margin (profitability ratio) | =gross profit/sales
-shows ability to sell more than cost |
| Operating Margin (profitability ratio) | Operating income/sales
-what you earn BEFORE interest/tax FROM EACH DOLLAR OF SALES |
| EBIT margin (profitability ratio) | EBIT/Sales
-similar to operating margin
-help assess relative efficiency of oepration
*SMALLER THE BETTER |
| Net Profit Margin (profitability ratio) | net income/sales
-fraction of each dollar in revenues available to equity holders after interest/taxes paid
-differences (when comparing) can be due to leverage (not just efficiency) which determines interest expense + assumption differences |
| Current Ratio (liquidity ratio) | current assets/current liabilities
-assess if you have sufficient working capital to meet short-term needs
Between: 1.5-2.5
Below 1 is an issue |
| Quick Ratio (liquidity ratio) | only cash comparison (AR + short-term investments) to current liabilities
-more stringent
-higher=less risk of cash shortfall in future
*exclude inventory as may not be liquid |
| Cash Ratio | Cash/current liabilities
-most stringent ratio
-ratios can be poor even if highly liquid/generate quick cash |
| Working Capital Ratios do what? | evaluate speed at which turn sales into cash |
| Higher inventory turnover= | shorter days=more efficient use of working capital |
| Why are working capital ratios useful? | useful when compared over time or within an industry, but across industries there are too large of differences |
| Interest Coverage Ratios | consider EBIT as a multiple of its interest expenses
-higher ratio=earning more than necessary to meet required interest payments |
| What is deducted when computing EBITDA? | depreciation/amortization expenses |
| When do we calculate EBITDA (earnings before interest, tax, depreciation/amortization)? | when need measure of the cash a firm generates from operations and what it has available to make interest payments |
| Leverage ratios | extent it relies on debt as a source of financing |
| What is P/E ratio used for? | value of equity to firms earnings
-used to assess if stock is over or undervalued based on idea if value of stock should be proportional to earnings level it generated from shareholders |
| Who is P/E Ratio highest for? | -industries with higher expected growth rates |
| what affects P/E ratio? | -risk
-sensitive to leverage choice |
| What are valuation ratios used for / which is best ro use? | INTRAindustry comparison of how firms priced in market
-best to use enterprise value when comparing ratios as had both debt and equity |
| When are P/E EBIT EBITDA not useful? | when have negative earnings
-look at enterprise value instead |
| Operating returns evaluate what? | evaluate return on investment by comparing income to investment |
| What does return on equity measure? | measures return that firm earned on past investments
-High ROE=able to find profitable opportunities |
| Return on assets good as... | its less sensitive to leverage but sensitive to working capital so use return on invested capital when needed |
| Return on invested capital measures? | after-tax profit generated excluding interest expense + compares it to raised capital from equity and debt holders already deployed
-most useful to assets underlying performance |
| what does the Dupoint identify give? | more insight to ROE |
| Debt to Capital Ratio | Total debt/ (Total Equity + Total debt) |
| Debt-to-Enterprise Value Ratio | Net Debt / Enterprise Value |
| Equity Multiplier | Total Assets/Book Value of equity |
| Equity Multiplier | Enterprise Value / Market Value of equity |
| Price-Earnings Ratio | Share Price/Earnings per share |
| Enterprise value to sales | Enterprise Value / Sales |
| Enterprise Value to EBIT | EV/EBIT |
| Asset Turnover | Sales/Total Assets |
| ROE | Net Income / Book value of equity |
| Return on Assets | (Net Income + interest expense)/Book Value of assets |
| ROIC | EBIT(1-Tax) / (book value + net debt) |
| Debt to Equity ratio (book) | Total Debt / Book Value of Equity
-can also use market value of equity |
| Inventory Days | Inventory/Average Daily cost of sales |
