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 asses 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