Discussion Fw1
Current: Current Assets
Current Liabilities
Quick (Acid-test): Current Assets (less inventories)
Current Liabilities
Debt-to-Equity: Total Debt (Liabilities)
Owners (Shareholders) Equity
Debt-to-Assets: Total Debt (Liabilities)
Total Assets
Interest Coverage: Earnings before EBIT
Times interest earned Interest Expense
Receivables Turnover: Annual Net Credit Sales
Receivables
Receivable Turnover in Days (RTD): 365
Average collection period Receivables Turnover
Inventory Turnover: COGS
Inventory
Inventory Turnover in Days (ITD): 365
Inventory Turnover
The number of times receivables
have been converted into cash
during the year.
Average # of days until receivables
are collected.
How much of the firms assets are
financed with debt.
COVERAGE RATIOS
Creditors (bondholders, lenders) like this to be low to provide a cushion
against losses, etc. Conversely, investors (shareholders), while seeing
increased risk in a high ratio, also like the higher ROE given the smaller
amount of equity.
An average vs. ending balance may be more appropriate to use for
inventory. COGS takes place over a time period vs. the static quality of
the balance sheet item (inventory).
How many times during the year was
our stock of inventory sold?
Average # of days inventory is held
before sold.
Ability to cover interest charges. Also
indicative of capacity to take on new debt.
Very important to creditors. Caveat: Does
not consider principal.
ACTIVITY RATIOS
Often better to use an average balance for receivables, given growth
and/or seasonal sales.
Ability to meet current debts with
current assets. Current: Usually 1
year or normal ops cycle.
LIQUIDITY RATIOS
Better, more conservative measure
of liquidity than above.
LEVERAGE RATIOS
Debt financing relative to Equity
financing. * From an equity investors perspective, Preferred
Stock can represent debt vs.equity for the purposes
of calculating this ratio.
Payables Turnover: Annual Credit Purchases
Accounts Payable
Payables Turnover in Days (PTD): 365 Average age of Accounts Payable
Payables Turnover
Total Asset Turnover: Net Sales
Total Assets
Net Profit Margin: Net Profit after Taxes
Net Sales
Return on Investment (ROI): Net Profit after Taxes
Return on Assets (ROA) Total Assets
Return on Equity (ROE): Net Profit after Taxes
Owners (Shareholders) Equity
How well the company is earning money
for its owners. Very important to
current/potential investors.
An average vs. ending balance may be more appropriate to use for AP.
Credit purchases take place over a time period vs. the static quality of
the balance sheet item (inventory).
How efficiently do our assets
generate sales? Again, an average vs. ending balance may be more appropriate to use
for assets. Sales (Income Statement item) take place over a time
period vs. the static quality of the balance sheet item (assets).
PROFITABILITY RATIOS
Again, an average vs. ending balance may be more appropriate to use
for assets. Profit (Income Statement item) take place over a time
period vs. the static quality of the balance sheet item (assets).
How well do our assets generate
profit?
Net Income per dollar of sales. The
profitability of our sales.