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  • Ratio – An expression of the mathematical relationship between one quantity and another. The relationship may be expressed either as a percentage, a rate, or a simple proportion.
  • Ratio analysis – A technique for evaluating financial statements that expresses the relationship between selected financial statement data.
  • Horizontal analysis – A technique for evaluating a series of financial statement data over a period of time, to determine the increase (decrease) that has taken place, expressed as either an amount or a percentage.
  • Vertical analysis – A technique for evaluating financial statement data that expresses each item within a financial statement as a percent of a base amount.
  • Acid-test (quick) ratio – A measure of a company’s immediate short-term liquidity; computed by dividing the sum of cash, short-term investments, and net receivables by current liabilities.
  • Current ratio – A measure used to evaluate a company’s liquidity and short-term debt-paying ability; computed by dividing current assets by current liabilities.
  • Asset turnover – A measure of how efficiently a company uses its assets to generate sales; computed by dividing net sales by average assets.
  • Debt to total assets ratio – Measures the percentage of total assets provided by creditors; computed by dividing total debt by total assets.
  • Inventory turnover – A measure of the liquidity of inventory; computed by dividing cost of goods sold by average inventory.
  • Liquidity ratios – Measures of the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash.
  • Payout ratio – Measures the percentage of earnings distributed in the form of cash dividends; computed by dividing cash dividends by net income.
  • Price-earnings (P-E) ratio – Measures the ratio of the market price of each share of common stock to the earnings per share; computed by dividing the market price of the stock by earnings per share.
  • Profit margin – Measures the percentage of each dollar of sales that results in net income; computed by dividing net income by net sales.
  • Profitability ratios – Measures of the income or operating success of an enterprise for a given period of time.
  • Receivables turnover – A measure of the liquidity of receivables; computed by dividing net credit sales by average net receivables.
  • Return on assets – An overall measure of profitability; computed by dividing net income by average assets.
  • Return on common stockholders’ equity – Measures the dollars of net income earned for each dollar invested by the owners; computed by dividing net income minus preferred dividends (if any) by average common stockholders’ equity.
  • Solvency ratios – Measures of the ability of the enterprise to survive over a long period of time.
  • Change in accounting principle – The use of a principle in the current year that is different from the one used in the preceding year.
  • Comprehensive income – Includes all changes in stockholders’ equity during a period except those resulting from investments by stockholders and distributions to stockholders.
  • Discontinued operations – The disposal of a significant segment of a business.
  • Earnings per share (EPS) – The net income earned on each share of common stock; computed by dividing net income minus preferred dividends (if any) by the number of weighted average common shares outstanding.
  • Extraordinary items – Events and transactions that are unusual in nature and infrequent in occurrence.
  • Pro forma income – A measure of income that usually excludes items that a company thinks are unusual or nonrecurring.
  • Quality of earnings – Indicates the level of full and transparent information provided to users of the financial statements.
  • Times interest earned – Measures a company’s ability to meet interest payments as they come due; computed by dividing income before interest expense and income taxes by interest expense.
  • Trading on the equity – Borrowing money at a lower rate of interest than can be earned by using the borrowed money.