--- date: '2025-03-21' description: and midterms. id: midterm modified: 2026-06-05 15:08:37 GMT-04:00 tags: - commerce4pa3 title: Operations and strategy created: '2025-03-21' published: '2025-03-21' pageLayout: default slug: thoughts/university/twenty-four-twenty-five/commerce-4pa3/midterm permalink: https://aarnphm.xyz/thoughts/university/twenty-four-twenty-five/commerce-4pa3/midterm.md generator: quartz: v4.6.0 hostedProvider: Cloudflare baseUrl: aarnphm.xyz full: https://aarnphm.xyz/llms-full.txt --- | Ratio | How Calculated | What It Shows | | ------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | **Profitability** | | | | 1. Gross profit margin | $\frac{\text{Sales} - \text{Cost of goods sold}}{\text{Sales}}$ | An indication of the total margin available to cover operating expenses and yield a profit. | | 2. Operating profit margin
(or return on sales) | $\frac{\text{EBIT}}{\text{Sales}}$ | An indication of the firm’s profitability from current operations without regard to the interest charges accruing from the capital structure. | | 3. Net profit margin
(or net return on sales) | $\frac{\text{EAT}}{\text{Sales}}$ | Shows after-tax profits per dollar of sales. Subpar profit margins indicate that the firm’s sales prices are relatively low or that costs are relatively high, or both. | | 4. Return on total assets | $\frac{\text{EAT}}{\text{Total assets}}$ or $\frac{\text{Profit after taxes} + \text{interest}}{\text{Total assets}}$ | A measure of the return on total investment in the enterprise. It is sometimes desirable to add interest to the after-tax profits to form the numerator of the ratio since total assets are financed by creditors as well as by stockholders; hence, it is accurate to measure the productivity of assets by the returns provided to both classes of investors. | | 5. Return on stockholders’ equity
(or return on net worth) | $\frac{\text{EAT}}{\text{Total stockholders equity}}$ | A measure of the rate of return on stockholders’ investment in the enterprise. | | 6. Return on capital employed | $\frac{\text{EAT} - \text{Preferred stock dividends}}{\text{Total stockholders equity} + \text{total debt} - \text{Par value of preferred stock}}$ | A measure of the rate of return on the total capital investment in the enterprise. | | 7. Earnings per share | $\frac{\text{EAT and after preferred stock dividends}}{\text{Number of shares of common stock outstanding}}$ | Shows the earnings available to the owners of each share of common stock. | | **Liquidity** | | | | 1. Current ratio | $\frac{\text{Current assets}}{\text{Current liabilities}}$ | Indicates the extent to which the claims of short-term creditors are covered by assets that are expected to be converted to cash in a period roughly corresponding to the maturity of the liabilities. | | 2. Quick ratio
(or acid-test ratio) | $\frac{\text{Current assets} - \text{Inventory}}{\text{Current liabilities}}$ | A measure of the firm’s ability to pay off short-term obligations without relying on the sale of its inventories. | | 3. Inventory to net working capital | $\frac{\text{Inventory}}{\text{Current assets} - \text{Current liabilities}}$ | A measure of the extent to which the firm’s working capital is tied up in inventory. | | **Leverage** | | | | 1. Debt-to-assets ratio | $\frac{\text{Total debt}}{\text{Total assets}}$ | Measures the extent to which borrowed funds have been used to finance the firm’s operations. Debt includes both long-term debt and short-term debt. | | 2. Debt-to-equity ratio | $\frac{\text{Total debt}}{\text{Total stockholders equity}}$ | Provides another measure of the funds provided by creditors versus the funds provided by owners. | | 3. Long-term debt-to-equity ratio | $\frac{\text{Long-term debt}}{\text{Total stockholders equity}}$ | A widely used measure of the balance between debt and equity in the firm’s long-term capital structure. | | 4. Times-interest-earned/coverage ratio | $\frac{\text{EBIT}}{\text{Total interest charges}}$ | Measures the extent to which earnings can decline without the firm becoming unable to meet its annual interest costs. | | 5. Fixed-charge coverage | $\frac{\text{EBIT} + \text{Lease obligations}}{\text{Total interest charges} + \text{Lease obligations}}$ | A more inclusive indication of the firm’s ability to meet all of its fixed-charge obligations. | | **Activity** | | | | 1. Inventory turnover | $\frac{\text{Sales}}{\text{Inventory of finished goods}}$ | When compared to industry averages, it provides an indication of whether a company has excessive or perhaps inadequate finished goods inventory. | | 2. Fixed assets turnover | $\frac{\text{Sales}}{\text{Fixed assets}}$ | A measure of the sales productivity and utilization of plant and equipment. | | 3. Total assets turnover | $\frac{\text{Sales}}{\text{Total assets}}$ | A measure of the utilization of all the firm’s assets; a ratio below the industry average indicates the company is not generating a sufficient volume of business, given the size of its asset investment. | | 4. Accounts receivable turnover | $\frac{\text{Annual credit sales}}{\text{Accounts receivable}}$ | A measure of the average length of time it takes the firm to collect the sales made on credit. | | 5. Average collection period | $\frac{\text{Accounts receivable}}{\text{Total sales} \div 365}$ or $\frac{\text{Accounts receivable}}{\text{Average daily sales}}$ | Indicates the average length of time the firm must wait after making a sale before it receives payment. | | **Other** | | | | 1. Dividend yield on common stock | $\frac{\text{Annual dividends per share}}{\text{Current market price per share}}$ | A measure of the return to owners received in the form of dividends. | | 2. Price-earnings ratio | $\frac{\text{Current market price per share}}{\text{After-tax EPS}}$ | Faster-growing or less-risky firms tend to have higher price-earnings ratios than slower-growing or more-risky firms. | | 3. Dividend payout ratio | $\frac{\text{Annual dividends per share}}{\text{After-tax EPS}}$ | Indicates the percentage of profits paid out as dividends. | | 4. Cash flow per share | $\frac{\text{EAT} + \text{Depreciation}}{\text{Number of common shares outstanding}}$ | A measure of the discretionary funds over and above expenses that are available for use by the firm. |