Financial Ratios

ACID TEST
The Acid Test, in financial terms, refers to a stringent measure of a company's short-term liquidity, which examines whether a business can cover its immediate liabilities without quickly selling its inventory.
Analytic Process
Procedures and techniques employed to perform an analysis of a situation or event. For example, an investor, in deciding whether to commit funds to a company, would engage in financial statement analysis by looking at trends in the accounts over the years (e.g., sales) and financial ratios.
Capital Turnover (Asset Turnover)
Capital Turnover, also known as Asset Turnover, measures the efficiency of a company in using its assets to generate sales revenue. A higher ratio indicates better utilization of assets in generating sales.
Cash Flow to Capital Expenditure Ratio
The Cash Flow to Capital Expenditure (CapEx) Ratio analyzes a company's ability to maintain its plant and equipment using cash generated from its operations, excluding dividends, rather than relying on external borrowing.
Cash to Current Liabilities Ratio
This key financial metric measures a company's liquidity by assessing its ability to meet short-term obligations using its cash and marketable securities.
Current Ratio
The ratio of a business's current assets to its current liabilities, expressed as x:1. This metric helps gauge the liquidity of a company, indicating its ability to meet short-term obligations.
Debt/Equity Ratio
The debt/equity ratio is a financial metric that indicates the relative proportion of a company’s debt to its total equity. It demonstrates how leveraged a company is in terms of its debt financing compared to its equity financing.
Debtor Collection Period
Debtor Collection Period, also known as Average Collection Period, is the average time it takes for a business to collect the money owed to it by its trade debtors. This period is critical for managing cash flow effectively.
Defensive Interval Ratio
A ratio that demonstrates the ability of a business to satisfy its current debts by calculating the time for which it can operate on current liquid assets, without needing revenue from the next period's sales.
Dividend Yield
A key metric used by investors to evaluate the income generated by an investment relative to its share price, providing insights into the return on investment from dividends.
Du Pont Formula
A comprehensive financial analysis method used to break down return on investment (ROI) into component parts: margin and turnover. This formula helps identify key drivers of a company's profitability.
Earnings Yield
Earnings yield is the ratio of the earnings per share of a company to the market price of the share, expressed as a percentage. It is an important metric for evaluating the profitability of a company relative to its share price.
EBIT (Earnings Before Interest and Taxes)
EBIT, an abbreviation for Earnings Before Interest and Taxes, represents a company's profit as indicated on the profit and loss account before the deduction of interest and tax expenses. This figure is instrumental in calculating multiple financial ratios and facilitates more straightforward comparisons between companies.
Equity Dividend Cover
A financial ratio indicating the ability of a company to pay dividends to its ordinary shareholders out of its distributable profits. A higher ratio suggests stronger dividend-paying capacity and financial health.
EV/EBITDA
The enterprise value (EV) of a company divided by its earnings before interest, taxation, depreciation, and amortization (EBITDA). This ratio is a crucial metric for assessing a company's overall financial health and investment potential.
Fixed-Asset to Equity-Capital Ratio
The Fixed-Asset to Equity-Capital Ratio is a financial metric used to assess a business's ability to satisfy long-term debt by comparing the value of its fixed assets to its equity capital.
Fixed-Asset Turnover Ratio
A ratio that measures an organization's activity over a period by calculating the number of times the sales are a multiple of the balance-sheet value of the fixed assets.
Fixed-Charge Coverage Ratio
The Fixed-Charge Coverage Ratio (FCCR) is a financial metric that reflects a company's ability to cover its fixed charges, such as interest and lease expenses, with its earnings before interest and taxes (EBIT). It's a key metric used by lenders and investors to assess a company's financial health and risk level.
Housing Affordability Index
An essential economic indicator that measures the capability of an average household to afford a home in a specific region. Primarily used to assess housing market conditions.
Income Gearing
Income gearing refers to the relationship between a company’s operating income and its financial obligations, particularly interest expenses on incurred debt. Essentially, it measures the extent to which a company's activities are funded by borrowed money.
Liquid Ratio (Quick Ratio)
A critical measure used to assess a company's short-term liquidity, focusing on the ability to cover current liabilities with liquid assets.
Margin of Safety Ratio
The margin of safety ratio is a financial metric used to measure the amount by which sales can drop before a business reaches its break-even point. It is expressed as a percentage of current sales.
Net Margin
Net margin—the percentage of revenue that remains as net income after all expenses have been deducted—serves as a key indicator of a company's overall profitability and financial health.
Net Profit Percentage
Net Profit Percentage, also known as the Net Margin Ratio, is a critical financial metric that measures a company's profitability by expressing net profit as a percentage of sales revenue.
Net Quick Assets
An essential liquidity measure that determines if a business can meet its short-term obligations with its most liquid assets.
Off-Balance-Sheet Financing
Off-balance-sheet financing refers to financial arrangements that do not appear on a company's balance sheet, thus not affecting its borrowing capacity as measured by financial ratios. It is commonly seen in operating leases rather than capital leases. GAAP requires disclosure of such financing in financial statements regarding credit, market, and liquidity risk.
Operating Ratio
Operating ratios are financial metrics used to measure and analyze a company's operational efficiency by relating various income and expense figures from the profit and loss statement to each other and to balance sheet figures.
Per-Capita Debt
Per-Capita Debt represents the total bonded debt of a municipality, divided by its population. It is a key metric used to assess and compare the debt burden of municipalities over time.
Preferred Dividend Coverage (PDC)
Preferred Dividend Coverage (PDC) is a financial ratio used to measure a company's ability to pay its preferred dividends from its earnings. It is calculated by dividing the net income after interest and taxes, but before the common stock dividends, by the dollar amount of preferred stock dividends. This ratio tells how many times over the preferred dividend requirement is covered by current earnings.
Profit Margin
Profit margin is a measure of profitability that calculates how much of every dollar earned by a company winds up as profit. It is critical for assessing the efficiency and performance of a company.
Profit-Sharing Ratio (PSR)
The ratio in which the profits or losses of a business are shared among its partners. For a partnership, the profit-sharing ratios will be defined in the partnership agreement, usually reflecting the amount, given as a percentage of the total profits, attributable to each partner.
Ratio Covenant
A Ratio Covenant is a form of covenant in a loan agreement that includes conditions relating to financial ratios such as the gearing ratio and interest cover.
Receivables Turnover
The receivables turnover ratio measures how efficiently a company collects its average accounts receivable over a specific period. It indicates the number of times average accounts receivable are collected in a year.
Return on Capital Employed (ROCE)
Return on Capital Employed (ROCE) is a financial ratio that measures a company's profitability and the efficiency with which its capital is employed.
Return on Equity (ROE)
Return on Equity (ROE) is a measure of financial performance, determined by dividing net income by shareholders' equity. ROE is an essential metric for evaluating a company's profitability and efficiency in generating profits from its equity.
Solvency
Solvency refers to the ability of an individual or an organization to meet its long-term financial obligations and continue its operations in the future. Specifically, solvency can represent a financial state where a person or company can pay their debts as they come due, or the extent to which a bank's assets exceed its liabilities.
Stock Turnover
Stock turnover, also known as inventory turnover, is a financial ratio that measures how many times a company's inventory is sold and replaced over a specific period.
Times Fixed Charge
Times Fixed Charge is a measure of a company's ability to meet its fixed financial obligations, commonly evaluated through the Fixed-Charge Coverage Ratio.
Times Interest Earned (TIE)
A crucial financial ratio that measures a company's ability to meet its debt obligations, calculated by dividing earnings before interest and taxes (EBIT) by the interest expenses for the same period.

Accounting Terms Lexicon

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