3.4 Assignment: Spreadsheet Exercises
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WorkshopThree-RatiosCheatSheet.docxFINANCIAL STATEMENTS ANALYSIS
Useful Financial Ratios
SHORT-TERM SOLVENCY RATIOS (The ability to pay short-term bills)
Current ratio = Current assets ÷ Current liabilities
Quick (acid test) ratio = (Current assets – Inventory) ÷ Current liabilities
Cash ratio = Cash ÷ Current liabilities
FINANCIAL LEVERAGE RATIOS (The ability to meet long-term obligations)
Total debt ratio (debt-assets) = Total debt ÷ Total assets = (Total assets – Total equity) ÷ Assets
Debt-equity ratio = Total debt ÷ Total equity
Alternate: Debt-equity ratio = Total debt ratio / (1 – total debt ratio).
Equity multiplier (assets-equity ratio) = Total assets ÷ Total equity = 1 + debt-equity ratio
Times interest earned = Earnings before interest and taxes ÷ Interest
Times burden covered = EBIT ÷ ((Interest expense + Principal payments) / (1- Tax rate))
Cash coverage = (Earnings before interest and taxes + depreciation + amortization) ÷ Interest
TURNOVER – CONTROL RATIOS (Measures efficiency of asset use)
Inventory turnover = Cost of goods sold ÷ Inventory
Days sales in inventory = 365 ÷ Inventory turnover
Days sales in cash = Cash and securities ÷ Sales per day
Receivables turnover = Credit sales ÷ Receivables (if credit sales unknown, use total sales)
Days’ sales in receivables (collection period) = 365 ÷ Receivables turnover
Payables turnover = Cost of Goods Sold ÷ Average Accounts Payable
Days’ payable (payables period) = 365 ÷ Payables turnover
Total asset turnover = Sales ÷ Total assets
Fixed asset turnover = Sales ÷ Net property, plant, and equipment
PROFITABILITY MEASURES (Measures efficiency of operations)
Profit margin = Net income ÷ Sales
Gross margin = Gross profit / Sales
Return on assets = Net income ÷ Total assets
Return on equity = Net income ÷ Total equity
Return on invested capital = (EBIT × (1- Tax rate)) ÷ (Interest-bearing debt + Equity)
EBITDA margin = EBITDA ÷ Sales
MARKET VALUE RATIOS (Measures how the market values the firm)
Price-to-earnings ratio = Market price per share ÷ Earnings per share
Market-to-book ratio = Market price per share ÷ Book value per share
Market capitalization = Market price per share × Shares Outstanding
Enterprise Value (EV) = Market capitalization + Market value of interest bearing debt – cash
EV Multiple = EV ÷ EBITDA
The Dupont Identity: ROE = Profit margin × Total asset turnover × Equity multiplier
