 |
|
Financial Ratios
|
Current
Ratio: |
Total
Current Assets
Total Current Liabilities |
|
This
ratio is a rough indication of a firm’s ability to
service its current obligations. Generally, the
higher the current ratio, the greater the “cushion”
between current obligations and a firm’s ability to
pay them. |
|
Quick
Ratio: |
Cash &
Equivalents +
Accounts Receivables
Total Current Liabilities |
|
Also
known as the “Acid Test” ratio, the quick ration is
a refinement of the current ratio and is a more
conservative measure of liquidity. The ratio
expresses the degree to which a company’s current
liabilities are covered by the most liquid current
assets. Generally, any value of less than 1 to 1
implies a dependency on inventory or other current
assets to satisfy short-term debt. |
|
Accounts Receivable Turnover: |
Sales
Accounts Receivable |
|
This
ratio measures the number of times account
receivables turn over during the year. The higher
the turnover of receivables, the shorter the time
between sale and cash collection. Be aware that this
ratio does not take into consideration seasonal
fluctuations. |
|
Days’
Receivables: |
|
Accounts_Receivable
Sales |
x365
|
|
|
This
figure expresses the time in days that receivables
are outstanding. Generally, the greater the number
of days outstanding, the greater the probability of
delinquencies. |
|
Accounts Payable Turnover: |
Cost
of Goods Sold
Accounts Payable |
This ratio measures the number of times account
payables turn over during the year. The higher the
turnover of payables, the shorter the time between
purchase and payment. Be aware that this ratio does
not take into consideration seasonal fluctuations.
|
|
Days’
Payables: |
|
Accounts_Payable
Cost of Goods Sold |
x365
|
|
|
This
expresses the average length of time trade debt is
outstanding. |
|
Inventory Turnover: |
Cost
of Goods Sold
Inventory |
This
ratio measures the number of times inventory is
turned over during the year. Compared to industry
averages, high inventory turnover can indicate
better liquidity or superior merchandising.
Conversely, it can indicate a shortage of needed
inventory for sales. Low inventory turnover can
indicate poor liquidity, possible overstocking, or
obsolescence. Conversely, it can indicate a planned
inventory buildup in case of material shortages.
|
|
Debt
to Equity Ratio: |
Total Liabilities
Total Stockholder’s Equity |
|
This
ratio expresses the relationship between capital
contributed by creditors and that contributed by
owners. It indicates the degree of protection
provided by the owners for the creditors. Compared
to industry averages, the higher the ratio, the
greater the risk being assumed by creditors. A lower
ratio generally indicates greater long-term
financial safety. |
|
|
|
 |
|
 |
|
