Times Interest Earned Ratio

Compare interest payments with income

available to pay them
Associated with long-term liabilities

Gross Profit & Gross Profit Ratio

Gross Profit
NET Sales minus Cost of Goods Sold
Amount of profit remaining to spend on operating
expenses, etc. after our product is paid for
Important first measure of profitability

Gross Profit Ratio

Indicates the portion of each dollar of sales
above its cost of goods sold

Return on Assets
Measures the income the company earns on
each dollar invested in assets

Net Income & Profit Margin

Net Income
Gross margin (gross profit) less operating
expenses, +/- nonoperating revenues or expenses
and income tax expense
The Bottom Line what is available to reinvest in
our company or pay our shareholders

Profit Margin
Measures the income earned on each dollar of
sales

Asset Turnover
Measures sales volume in relation to the
investment in assets

Return on Equity
Measures the income earned for each dollar in
stockholders equity
So if I invest in this company, for every dollar I have
invested the company was able to get a .22 cent
return
This is NOT what each owner will get in dividends!

Price-Earnings Ratio
Compares a companys share price with its
earnings per share
Indication of investors expectations of future
earnings
A low P/E ratio means the company may be
undervalued by the market (a bargain!) OR it may
mean the companys growth days are behind it
A higher P/E ratio means the market is expecting
the companys stock price to grow

MC Practice
Which of the following ratios is most useful in evaluating
solvency?
A. Receivables turnover ratio
B. Inventory turnover ratio
C. Debt to equity Ratio
D. Current Ratio

MC Practice
Which of the following ratios is most useful in evaluating
solvency?
A. Receivables turnover ratio
B. Inventory turnover ratio
C. Debt to equity Ratio
D. Current Ratio
Although the current ratio is also a measure of shortterm solvency, debt to equity gives us a better picture of
our long-term solvency by showing the analyst how
much debt a company has taken on relative to the
companys ownership interests

MC Practice
Which of the following is a positive sign that a
company can quickly turn its receivables into
cash?
A. A low receivables turnover
B. A high receivables turnover
C. A low average collection period
D. Both a high receivables turnover ratio and a low
average collection period

MC Practice
Which of the following is a positive sign that a
company can quickly turn its receivables into
cash?
A. A low receivables turnover
B. A high receivables turnover
C. A low average collection period
D. Both a high receivables turnover ratio and a
low average collection period

MC Practice
The Sports Shack reports Net Income of
$120,000, sales of $1,200,000, average assets of
$960,000, and current liabilities of $300,000. The
profit margin is:
A. 10%
B. ($60,000)
C. $120,000
D. 80%

MC Practice
The Sports Shack reports Net Income of
$120,000, sales of $1,200,000, average assets of
$960,000, and current liabilities of $300,000. The
profit margin is:
A. 10% (Net Income / Net Sales)
B. ($60,000)
C. $120,000
D. 80%