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Principles of Finance

Key Terms

Principles of FinanceKey Terms

Key Terms

accounts receivable turnover ratio
measures how many times in a period (usually a year) a company will collect cash from accounts receivable
book value per share
total book value (assets – liabilities) of a firm expressed on a per-share basis
cash ratio
represents the firm’s cash and cash equivalents divided by current liabilities; often used by investors and lender to assess an organization’s liquidity
current ratio
current assets divided by current liabilities; used to determine a company’s liquidity (ability to meet short-term obligations)
days’ sales in inventory
the number of days it takes a company to turn inventory into sales
debt-to-assets ratio
measures the portion of debt used by a company relative to the amount of assets
debt-to-equity ratio
measures the portion of debt used by a company relative to the amount of stockholders’ equity
DuPont method
framework for financial analysis that breaks return on equity down into smaller elements
earnings per share (EPS)
measures the portion of a corporation’s profit allocated to each outstanding share of common stock
efficiency ratios
ratios that show how well a company uses and manages its assets
inventory turnover
measures the number of times an average quantity of inventory was bought and sold during the period
liquidity
ability to convert assets into cash in order to meet primarily short-term cash needs or emergencies
market value ratios
measures used to assess a firm’s overall market price
operating cycle
amount of time it takes a company to use its cash to provide a product or service and collect payment from the customer
price/earnings (P/E) ratio
company’s stock price divided by the company’s earnings per share; indicates the amount investors are willing to pay for one dollar of earnings
profit margin
represents how much of sales revenue has translated into income
quick ratio
also known as the acid test ratio; ratio used to determine a firm’s ability to pay short-term debts using its most liquid assets
return on equity
measures the company’s ability to use its invested capital to generate income
return on total assets
measures the company’s ability to use its assets successfully to generate a profit
solvency
implies that a company can meet its long-term obligations and will likely stay in business in the future
times interest earned (TIE) ratio
measures the company’s ability to pay interest expense on long-term debt incurred
total asset turnover
measures the ability of a company to use its assets to generate revenues
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