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.