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Fin 360 Final Intrps
fin 360 ratios test
| Question | Answer |
|---|---|
| ROE and ROA relationship | ROE = (net profit margin)(total asset T/O)(equity multiplier). NPM is net income/sales and TA T/O is Sales/sales TA. so (NPM)(TA T/O) becomes NI/TA, which is also ROA. SO, ROE = ROA (EM) |
| CCC | How long cash is tied up in a firms operations before its converted back into cash. Lower CCC cash comes back faster (better liquidity, can pay you faster if you're a lender). Higher CCC cash comes back slower (worse liquidity, takes longer) |
| Days Inventory | How long on average inventory sits before it is generated into sales. (low good to an extent --> if too low, not enough inventory and possibly can't meet demand for customers, they go to competitors.) |
| Avg Collection Period (Days in Receivables) | How long it takes for the companies to collect cash from customers after sales. (low good) |
| Days in Payables | How long it takes for the company to pay its suppliers for inventory (high good to an extent) |
| Positive Cash Flow From Assets | The firm has enough cash generated from their operations to cover investments and working capital. The firm has extra cash that they can pay out to creditors or shareholders. |
| Negative Cash Flow From Assets | The firm doesn't have enough cash generated from their operations to cover investments and working capital, so it must raise cash from its creditors (borrowing) or shareholders (issue stock) to make up for it. |
| Positive Cash Flow to Creditors | The firm is paying out more money to creditors than it is receiving from new borrowing. Could mean reducing debt and deleveraging (using less debt vs. equity). |
| Negative Cash Flow to Creditors | The firm is borrowing more money than it is paying out to creditors, resulting in more cash. |
| Positive Cash Flow to Shareholders | The firm is paying out more in dividends or repurchasing stock than it is raising from issuing new stock. Means the firm is returning capital to owners rather than financing itself. Likely well-off company trying to reward shareholders with extra cash. |
| Negative Cash Flow to Shareholders | The firm is receiving more cash from issuing equity than it is paying out in dividends to shareholders or repurchasing stock. Likely growing company trying to receive funds to finance itself and invest. |
| Current Ratio | tells you about a company's short term liquidity by comparing current assets to current liabilities. Higher than 1 = healthy liquidity, lower than 1 = potential trouble meeting debt, more than 3 = in trouble/high inefficiency |
| Quick Ratio | tells you about a company's immediate liquidity excluding slower-to-sell items such as inventory. Higher than 1 = healthy liquidity, lower than 1 = possible trouble meeting debts. |
| Total Asset T/O | How efficiently a company uses its total assets to generate sales. Higher ratio means more sales per dollar of assets, lower means possible underutilization of assets. |
| Accounts Receivables T/O | how efficiently a company collects payments from customers. Higher ratio such as 10x means faster collections/strong credit policies, lower means slow payments, cash tied up. |
| Accounts Payable T/O | how quickly a company pays its suppliers. Higher ratio (ex. 10x) means fast payments but possible cash flow strain. Lower ratio means stretching out loans for more liquidity, preserves cash but risks supplier relations. |
| Inventory T/O | measures how efficiently a company sells and replaces its inventory over a period. Higher ratio (ex. 8-12x) means fast moving inventory, strong sales. Lower ratio means slow sales, overstocking, tied up capital. |
| Fixed Asset T/O | how efficiently a company generates sales FROM its fixed assets. Higher ratio means stronger use of fixed assets for revenue (efficient), lower means underused capacity or a company that requires massive investments in fixed assets to operate. |
| Total Debt Ratio | shows the proportion of a firm's assets FINANCED BY DEBT, revealing overall leverage. higher ratio means heavier debt reliance, bankruptcy risk but more growth potential. lower ratio means conservative financing, more equity funded. |
| Why is debt better for funding than equity? | 1. Tax advantage - interest payments are tax-deductible, lowering borrowing costs, where dividends aren't. 2. No ownership dilution. 3. Leverage effect as debt amplifies returns on equity (higher yields). |
| Why does debt amplify returns on equity? | Debt lets you control more assets than your cash alone, which magnifies profits. Debt acts as a bridge, as temporary cash enables permanent growth, with the returns far outpacing the repayments to loaners. |
| Debt to Equity Ratio | how much a company relies on debt vs. equity to finance itself. higher D/E means heavy leverage, lower D/e means less leverage. |
| Equity Multiplier | shows how many dollars of total assets are financed for each dollar of shareholders equity. higher means higher leverage, lower means more equity funded. |
| Current Debt Ratio | highlights how much of your total assets are financed by short term debt. higher ratio means more reliance on short term debt, lower means less reliance. |
| Long Term Debt Ratio | highlights how much of your total assets are financed by long term debt. higher ratio more reliance on LTD, lower means less reliance. |
| Times Interest Earned (Interest Coverage Ratio) | assesses a company's ability to handle interest with its earnings before interest and taxes. High ratio means strong coverage, earnings easily handle interest with low default risk, low means weak, earnings barely or don't cover, signaling distres |
| Gross Profit Margin | how efficient a company's operations generate profit before overhead costs. higher means competitive advantage, plenty left for expenses/profit. lower means COGS pressure, less for expenses/profit. |
| EBIT Margin | measures profitability as a % of revenue, excluding interest and taxes. high means strong ops before financing, low means struggles covering debt costs. |
| Net Profit Margin | measures overall business profitability after all expenses, showing what % of sales becomes bottom line profit. high means better, healthy for shareholders as it ties to ROE, low means worse. |
| Return on Assets | how efficiently a company uses its total assets to generate net income (NOT SALES like TA T/O). ties into ROE as higher roa helps it. higher roa means strong asset utilization, more profit from each asset dollar. low means vice versa, poor efficiency. |
| Return on Equity | how effectively a firm turns shareholders equity into profits, expressed a percentage return. "for every $1 of equity capital, how much net profit is generated?". high roe = strong management, creates value, growth potential. low means poor capital eff. |
| Operating Cycle (OC) | avg days from buying inventory to collecting cash from sales. shorter oc means faster cash conversion - better liquidity. higher oc means cash is tied up longer, strains liquidity. |
| Price/Earnings Ratio | how much investors would pay per dollar of current earnings(net income). high p/e (ex. 30x) means growth stock, market expects strong future earnings. low p/e means value stock, cheap relative to earnings. |
| PEG Ratio | reveals if a stock's price is justified by its growth prospects. PEG <1, undervalued growth outpaces price (potential buy). PEG =1, fairly valued price matches expct growth. PEG>1, overvalued, high P/E not supported by growth (risky). |
| Price/Sales Ratio | how much investors pay per dollar of company's revenue. low p/s means potentially undervalued, cheap relative to sales. high p/s means investors are paying a premium for each rev dollar, expecting high growth but could be overvalued. |
| Book Value Per Share | accounting value of a company's equity available. if stock price < bvps, undervalued (investors love this). stock price > bvps, paying a premium for growth, could be overvalued. |
| Market-Book Ratio | how much the market values a company compared to what its worth on its balance sheet. >1 investors expect strong growth and profitability, <1 could be undervalued |
| Dividend Yield | measures the annual dividend income you get as a percentage of the stocks current price. high yield is more dividend income, low yield means firms focusing on growth and reinvesting profits. |
| Market Capitalization | total dollar value of a company's outstanding shares (stock price x shares outstanding). larger cap means more stable and elite, mid could mean growth, smaller means higher risk/higher reward. |
| Enterprise Value | total takeover cost of a firm, market cap plus debt - cash. shows true acquisition price. |
| Internal Growth Rate (IGR) | maximum growth rate a firm can sustain without EXTERNAL FINANCING. high means stronger internal funding power (high profitability) NO NEW DEBT OR EQUITY |
| Sustainable Growth rate | maximum growth rate a firm can achieve using retained earnings without changing its capital structure (debt/equity ratio). DEBT OK IF D/E RATIO STAYS SAME |
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