RSM219 Ratios.docx

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Department
Rotman Commerce
Course
RSM219H1
Professor
Elisa Zuliani
Semester
Fall

Description
PROFITABILITY = measures the earnings or operations success of a company for a specific period of time Earnings Per Share Net Earnings – Preferred Dividends  Measures the net earnings for each common share (EPS) Weight Avg Number of Common Shares  Not meaningful to compare among companies b/c wide variation in number of shares/financing structures Price Earnings (PE) Market Price Per Share  Measures the ratio of the stock price of each common share to its Earnings Per Share earnings per share  Show what investors expect of a company’s future earnings [higher investors predict increase in earnings, lower investors expect decrease in earnings]  High may also suggest that shares are overvalued  Cannot be negative Payout Ratio Cash Dividends  Measures % of earnings distributed as cash dividends Net Earnings  Higher is better for investors seeking income Dividend Ratio Dividend per Share  Measures earnings generated for the shareholder by each share, Market Price per Share based on the market price per share  Higher is better for investors seeking income Gross Profit Margin Gross Profit *100  How much higher the selling price is than the COGS Net Sales  Company’s GP expressed as a %, More informative than GP amount  Higher better than lower  Compare to industry & competitor  # is % in income, 1-# is COGS Profit Margin Net Earnings *100  How well the selling price covers all expenses Net Sales  Company’s Net earnings expressed as a %  Change this by: increasing GP Margin or controlling expense  Higher better than lower Return on Assets Net Earnings *100  Amount of net earnings generated by each dollar invested in asset Average Total Assets  Higher the better Asset Turnover Net Sales  How efficiently a company uses its assets – how many dollars of Average Total Sales sales are generated by each dollar invested in assets  Higher the better Return on Common Net Earnings – Preferred Dividends  Measures profitability of shareholders’ investment Shareholders’ Equity Avg Common Shareholders’ Equity  Higher the better Page | 1 LIQUIDITY = measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash Working Capital = Current Assets – Current Liabilities  A higher amount indicates liquidity  Negative: may have to borrow money, short-term investors may not be paid  Industry average not useful Current Ratio Current Asset  A higher amount indicates liquidity Current Liabilities  More dependable than working capital  Does not take account the composition of current assets
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