Page 100 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Unit 4: Responsibility Centers

Notes
Leverage ratios
1. Debt to assets ____Total debt____ Measures the extent to which borrowed
ratio Total assets funds have been used to finance the
firm’s operations. Debt includes both
long-term debt and short-term debt.
2. Debt to equity _____Total debt______ Provides another measure of the funds
ratio Total stockholder’s equity provided by creditors versus the funds
provided by owners.
3. Long-term _____Long-term debt____ A widely used measure of the balance
debt to equity Total stockholders equity between debt and equity in the firm’s
ratio long-term capital structure.
4. Times’ interest Profits before interest and Measures the extent to which earnings
earned (or taxes can decline without the firm becoming
coverage) ratio Total interest charges unable to meet its annual interest costs.
5. Fixed charge Profits before taxes & A more inclusive indication of the firm’s
coverage interest + _____Lease ability to meet all of its fixed charge
obligations______ obligations.
Total interest charges +
Lease obligations
Activity ratios
1. Inventory ________Sales________ When compared to industry averages, it
turnover Inventory of finished goods provides an indication of whether a
company has excessive or perhaps
inadequate finished goods inventory.
2. Fixed assets _____Sales ____ A measure of the sales productivity and
turnover Fixed Assets utilization of plant and equipment.
3. Total assets _____Sales ____ A measure of the utilization of all the
turnover Total Assets 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 ____Annual credit sales____ A measure of the average length of time
receivable Accounts receivable it takes the firm to collect the sales made
turnover on credit.
5. Average ____Accounts receivable___ Indicates the average length of time the
collection period Total sales/365 firm must wait after making a sale before
Or it receives payment.
___Accounts receivable__
Average daily sales
Other ratios
1. Dividend yield __Annual dividends per A measure of the return to owners
on common stock share_ received in the form of dividends.
Current market price per
share
2. Price earnings Current market price per Faster growing or less risky firms tend to
ratio share have higher price-earnings ratios than
After tax earnings per share slower growing or more risky firms.
3. Dividend __Annual dividends per Indicates the percentage of profits paid
payout ratio share_ out as dividends.
After tax earnings per share
4. Cash flow per After tax profits + A measure of the discretionary funds
share Depreciation over and above expenses that are
Number of common shares available for use by the firm.
outstanding

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