Formula Sheet

Question 1

1. Calculate return on equity
2. Provide explanation
3. Interpretation

Answer 1

1. ROE = Net Income (profit)/average shareholder’s equity,) * average shareholder’s equity is calculated as (total assets - total liabilities from the previous year + the current year)/ 2
2. Return on equity illustrates how well a company invests the equity of shareholder to provide a return, in other words, how much profit is generated for each dollar of equity invested by shareholder’s
3. The higher the number the better the organisation is at returning a profit to shareholders based on the equity they have invested.

Question 2

1. Calculate return on assets
2. Provide explanation
3. Interpret

Answer 2

1. Net Income (Profit)/Total Assets)
2. How good a company can generate profit by using it’s assets.
3. The higher the number the better the organisation is at utilising its assets to generate a profit.

Question 3

1. Calculate Gross Profit Margin
2. Provide explanation
3. Interpret

Answer 3

1. (Sales - Cost of Sales)/Sales * sales also known as revenue
2. The amount of money left over from the sale of a product after all direct manufacturing costs have been subtracted.
3. The higher the contribution margin the better the organisation is at keep its manufacturing costs low

Question 4

1. Calculate Current Ratio
2. Provide explanation
3. Interpret

Answer 4

1. Also known as working capital Current Assets/Current Liabilities
2. The firm’s ability to pay off its short-term liabilities with its current assets. An organisation with a large number of current assets with be more capable to pay off short-term liabilities without the need to sell assets.
3. A current ratio below 1 signifies that the firm does not have enough current assets to cover current liabilities obligations.

Question 5

1. Current Quick Ratio Formula
2. Provide explanation
3. Interpret

Answer 5

1. (Cash & Cash equivalent + marketable securities + accounts receivable)/Current Liabilities
2. Pay current liabilities with assets that can be converted to cash within 90 days
3. A quick ratio of 1.5 signifies that an organisation has $1.50 of liquid assets to cover $1 of current liabilities, the higher the ratio the better an organisation’s liquid position.

Question 6

1. Calculate Debt to Equity Formula
2. Describe
3. Interpret

Answer 6

1. Total Liabilities/Total Shareholder’s Equity

* Shareholder’s Equity = Assets - Liabilities

2. The percentage of debt used to finance assets relative to the equity used to finance assets from shareholders.
3. The higher the percentage the larger the amount of debt used compared to equity for financing assets, signifying a stronger leverage position.

Question 7

1. Calculation Accounts Receivable
2. Definition
3. Interpretation

Answer 7

1. Credit Sales/Accounts Receivables

* sales that are made on account which can be paid at a later date

2. How many times a year a firm converts accounts recievable into cash
3. 11.00 refers to a company converting accounts receivables into cash 11 times a year, a high number signifies that the accounts receivable policy is efficient and that customer’s pay off debts quickly.

Question 8

1. Construct Formula of Total Asset Turnover
2. Definition
3. Interpretation

Answer 8

1. Sales/Total Average Assets

* (Beginning Assets + End Assets)/2

2. How efficient an organisation can generate sales from the use of its assets.
3. 0.50, for each dollar of assets deployed the company generates 0.50 cents in sales.

Question 9

1. Construct Formula of Debt to Assets
2. Definition
3. Interpretation

Answer 9

1. Total Liabilities/Total Assets
2. Percentage of total assets there financed by creditors, liabilities
3. 0.4 refers that 40% of total assets were financed by debt, and the remaining 60% were financed by equity owner’s.

Question 10

1. Construct Formula of Inventory Turnover
2. Explanation
3. Interpretation

Answer 10

1. Cost of Goods Sold/ Average Inventory

* (Beginning Inventory + End Inventory)/2

2. How many times an organisation sold its total average inventory dollar amount during the year
3. 5, the organisation sells its total average inventory times a year

Question 11

1. Construct Formula of Interest Coverage
2. Definition
3. Interpretation

Answer 11

1. EBIT/Interest Expense

* EBIT = Profit + Interest + Taxes

* Interest Expense located on the income statement

2. The ability of the firm to meet interest rate obligations on debt.
3. When an organsiation’s ratio is 1.5 or lower it’s ability to meet interest expeneditures is of concern, lower than 1.0, it will most likely require cash reserves or borrow more to meet the requirement.

Question 12

1. Formula Construction of Dividend Per Share
2. Explanation
3. Interpretation

Answer 12

1. Ordinary Dividends/Number of Ordinary Shares

*Dividends paid/Number of outstanding shares issued

2. The sum of declared dividends for every ordinary shares issued
3. Dividends are a form of profit distribution to the shareholder, a growing dividend per share signifies the belief that the growth can be sustained.

Question 13

1. Formula Construction of Dividend Yield
2. Explanation
3. Interpretation

Answer 13

1. DPS/Market Price Per Share
2. How much cash flow you are recieving for each dollar invested in stock
3. If a stock is trading at $20 and dividend is $1, the 5% is the return on the stock, the higher the better.

Question 14

1. Formula Construction of Price to Earnings
2. Definition
3. Explanation

Answer 14

1. Market Price per Share/Earnings Per Share
2. How much investors are willing to pay for the stock relative to the company’s earnings
3. P/E = 12, for every $1 of earnings you pay $3, a higher P/E forecasts increasing earnings growth in the future, a low P/E indicates an undervalued company.

Question 15

1. Formula Construction of Net Tangible Assets Per Share
2. Definition
3. Interpretation

Answer 15

1. Net Tangible Assets = Total Assets - Total Liabilities - Intangible Assets

Net Tangible Assets/ Number of Shares on Issue

2. The money that each shareholder would receive if the organization were to go into liquidation and all assets were sold.
3. Is the company or shareprice overvalued or undervalued?

Question 17

1. Formula Construction for Additional Funds Needed
2. Explanation
3. Interpretation

Answer 17

1. AFN = Project increase in assets - Spontaneous increase in liabilities - any increase in retained earnings.
2. Determine how much new funding is required to obtain more assets to increase revenue
3. If a negative value is found it means that the action would generate extra income which could be invested somewhere else.