Average days’ inventory on hand Days in the year divided by inventory turnover; a measure that shows the average number of days taken to sell inventory.

Average days’ payable Days in the year divided by payables turnover; a measure that shows the average number of days taken to pay accounts payable.

Average days’ sales uncollected "Days in the year divided by receivable turnover; a measure that shows the number of days, on average, that a company must wait to receive payment for credit sales."






Base year "In financial analysis, the first year to be considered in any set of data."






Cash flows to assets Net cash flows from operating activities divided by average total assets; a measure of the ability of assets to generate operating cash flows.

Cash flows to sales Net cash flows from operating activities divided by net sales; a measure of the ability of sales to generate operating cash flows.

Cash flow yield Net cash flows from operating activities divided by net income; a measure of a company’s ability to generate operating cash flows in relation to net income.

Common-size statement A financial statement in which the components of a total figure are stated in terms of percentages of that total.

Current ratio Current assets divided by current liabilities; a measure of short-term debt-paying ability.






Debt to equity ratio "Total liabilities divided by stockholders’ equity; a measure that shows the relationship of debt financing to equity financing, or the extent to which a company is leveraged."

Diversified companies Companies that operate in more than one industry. Also called conglomerates.

Dividends yield Dividends per share divided by market price per share; a measure of a stock’s current return to an investor.






Financial performance evaluation All the techniques used to show important relationships in financial statements and to relate them to important financial objectives. Also called financial statement analysis.

Free cash flow Net cash flows from operating activities minus dividends minus net capital expenditures; a measure of cash generated or cash deficiency after providing for commitments.






Horizontal analysis A technique for analyzing financial statements that involves the computation of changes from the previous to the current year in both dollar amounts and percentages.






Index number "In trend analysis, a number that shows changes in related items over time, which is calculated by setting the base year equal to 100 percent."

Interest coverage ratio Income before income taxes plus interest expense divided by interest expense; a measure of the degree of protection creditors have from default on interest payments.

Interim financial statements "Financial statements issued for a period of less than one year, usually a quarter or a month."

Inventory turnover The cost of goods sold divided by average inventory; a measure of the relative size of inventory.






Operating cycle Average days’ inventory on hand plus average days’ sales uncollected; the time it takes to sell products and collect for them.






Payables turnover Cost of goods sold plus or minus change in inventory divided by average accounts payable; a measure of the relative size of accounts payable.

Portfolio A group of loans or investments designed to average the returns and risks of a creditor or investor.

Price/earnings (P/E) ratio Market price per share divided by earnings per share; a measure of investor confidence in a company and a means of comparing stock values.

Profit margin Net income divided by net sales; a measure that shows the percentage of each revenue dollar that contributes to net income.






Quick ratio "The more liquid current assets—cash, marketable securities or short-term investments, and receivables—divided by current liabilities; a measure of short-term debt-paying ability."






Ratio analysis A technique of financial performance evaluation that identifies meaningful relationships between the components of the financial statements.

Receivable turnover Net sales divided by average accounts receivable; a measure of the relative size of accounts receivable and the effectiveness of credit policies.

Return on assets "Net income divided by average total assets; a measure of overall earning power, or profitability, that shows the amount earned on each dollar of assets invested."

Return on equity Net income divided by average stockholders’ equity; a measure of how much income was earned on each dollar invested by stockholders.






Trend analysis A type of horizontal analysis in which percentage changes are calculated for several successive years instead of for two years.






Vertical analysis A technique for analyzing financial statements that uses percentages to show the relationships of the different parts to a total in a single statement.