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Questions and Answers
What does the Dividend Yield ratio indicate?
What does the Dividend Yield ratio indicate?
- Return based on paid up value of shares (correct)
- Return based on average investment
- Return on market value of shares
- Return based on the net worth of the company
Which formula correctly represents Dividend Yield?
Which formula correctly represents Dividend Yield?
- Change in share price/Initial share price × 100
- Dividend per Share/DPS × Market Price per Share
- Dividend ± Change in share price/Initial share price × 100 (correct)
- Dividend per Share/DPS × Initial share price
What is the Earnings Yield also referred to as?
What is the Earnings Yield also referred to as?
- Earnings Return Ratio
- Earnings Fair Value
- Earnings Distribution Ratio
- Earnings Price Ratio (correct)
What does a higher Market Value/Book Value ratio indicate?
What does a higher Market Value/Book Value ratio indicate?
How is Earning per Share (EPS) calculated?
How is Earning per Share (EPS) calculated?
What does the Dividend per Share (DPS) formula use as its denominator?
What does the Dividend per Share (DPS) formula use as its denominator?
What does a high net profit ratio indicate about a business?
What does a high net profit ratio indicate about a business?
Which formula represents the net profit ratio?
Which formula represents the net profit ratio?
Which aspect does the Earnings Price Ratio indicate?
Which aspect does the Earnings Price Ratio indicate?
What does the Net worth represent in the Market Value/Book Value ratio?
What does the Net worth represent in the Market Value/Book Value ratio?
What does the operating profit ratio assess?
What does the operating profit ratio assess?
Which of the following is equivalent to operating profit?
Which of the following is equivalent to operating profit?
What does the pre-tax profit ratio measure?
What does the pre-tax profit ratio measure?
Earnings before interest and taxes (EBIT) are used in which ratio?
Earnings before interest and taxes (EBIT) are used in which ratio?
Which statement about the net profit ratio is true?
Which statement about the net profit ratio is true?
How is the operating profit ratio calculated?
How is the operating profit ratio calculated?
What does the acid-test ratio primarily assess?
What does the acid-test ratio primarily assess?
Which of the following is considered a quick asset?
Which of the following is considered a quick asset?
What does an acid-test ratio of 1:1 indicate?
What does an acid-test ratio of 1:1 indicate?
Which of the following is a key component in calculating the cash ratio?
Which of the following is a key component in calculating the cash ratio?
The Basic Defense Interval formula measures what aspect of a business?
The Basic Defense Interval formula measures what aspect of a business?
If the majority of quick assets are in accounts receivable, what is a potential risk?
If the majority of quick assets are in accounts receivable, what is a potential risk?
What is the primary purpose of quick assets in business analysis?
What is the primary purpose of quick assets in business analysis?
Which two components are essential for computing the cash ratio?
Which two components are essential for computing the cash ratio?
What does the equity ratio indicate about a business?
What does the equity ratio indicate about a business?
Which ratio specifically assesses the long-term solvency of a firm?
Which ratio specifically assesses the long-term solvency of a firm?
What is included in total debt according to the content?
What is included in total debt according to the content?
Which of the following is NOT a capital structure ratio?
Which of the following is NOT a capital structure ratio?
How does a higher equity ratio affect the perception of risk for lenders?
How does a higher equity ratio affect the perception of risk for lenders?
The debt to total assets ratio primarily compares which two components?
The debt to total assets ratio primarily compares which two components?
What does the debt-service coverage ratio (DSCR) measure?
What does the debt-service coverage ratio (DSCR) measure?
Which ratio provides insight into the financing techniques of a business?
Which ratio provides insight into the financing techniques of a business?
What does the Net Profit Ratio measure?
What does the Net Profit Ratio measure?
Which ratio assesses the operating performance of a business?
Which ratio assesses the operating performance of a business?
The Operating Expenses Ratio measures what aspect in relation to sales?
The Operating Expenses Ratio measures what aspect in relation to sales?
How is the Return on Investment (ROI) calculated?
How is the Return on Investment (ROI) calculated?
Which ratio indicates the proportion of financial expenses in relation to sales?
Which ratio indicates the proportion of financial expenses in relation to sales?
What does the Expenses Ratio specifically compare?
What does the Expenses Ratio specifically compare?
The Operating Ratio is used to measure which of the following?
The Operating Ratio is used to measure which of the following?
The formula for calculating the Expenses Ratio is based on?
The formula for calculating the Expenses Ratio is based on?
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Study Notes
Profitability Ratios
- Net Profit Ratio: Measures the proportion of revenue remaining as profit after all expenses. A higher ratio signifies positive returns.
- Can be calculated as: (Net Profit/Sales) x 100
- or: (Earnings after taxes (EAT)/Sales) x 100
- Pre-tax Profit Ratio: Measures the relationship between earnings before taxes (EBT) and sales.
- Calculated as: (Earnings before taxes (EBT)/Sales) x 100
- Operating Profit Ratio: Evaluates business operating performance. Measures the percentage of each sale that remains after costs and expenses (excluding interest and taxes).
- Can be calculated as: (Operating Profit/Sales) x 100
- or: (Earnings Before Interest & Taxes (EBIT)/Sales) x 100
- Operating Profit: Sales - Cost of Goods Sold (COGS) - Operating Expenses
- Dividend and Earning Yield: Indicates return on investment. A higher dividend percentage indicates greater return on the paid-up value of shares.
- Calculated as: ((Dividend ± change in share price)/Initial share price) x 100
- or: (Dividend per Share (DPS)/Market Price per Share (MPS)) x 100
- Earnings Yield (EP Ratio): Measures the return on investment using closing investment value.
- Calculated as: (Earnings per Share (EPS)/Market Price per Share (MPS)) x 100
- Market Value/Book Value per Share (MV/BV): Evaluates how investors perceive the company's past and future performance.
- Calculated as: (Average share price/(Net worth ÷ Number of equity shares))
- or: (Closing share price/(Net worth ÷ Number of equity shares))
- Quick Ratio (Acid Test Ratio): Measures the ability to meet short-term obligations with readily convertible assets.
- Calculated as: (Quick Assets/Current Liabilities)
- Quick assets: Cash and near-cash assets (excluding inventories).
- Cash Ratio/Absolute Liquidity Ratio: Measures the absolute liquidity of a business based on only readily available cash and marketable securities.
- Calculated as: ((Cash and Bank balances + Marketable Securities)/Current Liabilities)
- or: ((Cash and Bank balances + Current Investments)/Current Liabilities)
- Basic Defense Interval/Interval Measure: Measures the number of days a company can operate using its current cash and receivable balances.
- Calculated as: ((Cash and Bank balances + Net Receivables + Marketable Securities) / (Operating Expenses ÷ Number of days in the period))
Capital Structure Ratios
- These ratios provide insights into the financing techniques employed by a business, focusing on its long-term solvency position.
- Equity Ratio: Represents the proportion of owner's funds to the total funds invested in the business.
- Calculated as: (Shareholder's Equity/Net Assets)
- Shareholder's equity includes Equity Share Capital and Reserves & Surplus.
- Net Assets include Net Fixed Assets and Net Current Assets.
- Debt Ratio: Measures the proportion of debt to total assets.
- Calculated as: (Total Debt/Net Assets)
- Total debt encompasses short and long-term borrowings.
###Â Coverage Ratios
- These ratios assess a company's ability to meet its financial obligations through a specific coverage level.
- Debt-Service Coverage Ratio (DSCR): Measures the ability to meet debt obligations (including principal and interest payments) using operating income.
- Interest Coverage Ratio: Measures a company's ability to service interest payments on debt using earnings before interest and taxes (EBIT).
- Preference Dividend Coverage Ratio: Measures a company's ability to meet preference dividend payments using available profits.
- Fixed Charges Coverage Ratio: Measures a company's ability to meet all fixed charges (interest and preferred dividends) using earnings before interest and taxes (EBIT).
###Â Expenses Ratios
- These ratios analyze a company's expenses in relation to its sales revenue.
- Cost of Goods Sold (COGS) Ratio: Measures the percentage of revenue spent on producing the goods sold.
- Calculated as: (COGS/Sales) x 100
- Operating Expenses Ratio: Measures the proportion of revenue allocated to administrative, selling, and distribution expenses.
- Calculated as: ((Administrative expenses + Selling & Distribution Overhead)/Sales) x 100
- Operating Ratio: Measures total operating expenses (COGS and operating expenses) as a percentage of sales.
- Calculated as: ((COGS + Operating expenses)/Sales) x 100
- Financial Expenses Ratio: Measures the proportion of revenue allocated to financial charges (interest, etc.).
- Calculated as: (Financial expenses/Sales) x 100
###Â Profitability Ratios related to Overall Return on Assets/ Investments
- Return on Investment (ROI): Measures the overall profitability of a business, focusing on the return on investment, equity funds, capital employed, or total assets.
- Calculated as: (Return/Profit/Earnings/Investments) x 100
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