# Finance Ratios/Financial Statement Analysis

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#### Finance Ratios/Financial Statement Analysis - Leaderboard

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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 |