Discussion Assignment 3.1

FINANCIAL RATIOS FOR MEASURING PERFORMANCE

INTRODUCTION Ratio analysis is a method of providing an organization with a meaningful comparison of financial performance with other organizations in the industry. For reporting financial performance, data are categorized into four primary ratio groups:

Profitability Ratios: These ratios enable the organization to measure if there has been an adequate return on sales or services, total assets and invested capital. Common profitability ratios are profit margin, return on assets or investments and return on equity.

Asset Utilization Ratios: These ratios measure the speed of how the organization is turning over accounts receivable, inventories, and longer term assets. Examples of asset utilization ratios include accounts receivable turnover, average collection period, inventory turnover, fixed asset turnover, and total asset turnover.

Liquidity Ratios: These ratios measure how quickly the organization can turn assets over into cash or to pay off short term debts. Most consistently used liquidity ratios are current ratio and quick ratio.

Debt Utilization Ratios: These ratios measure the overall debt position of the organization focusing on asset base and earning power. The debt ultilization ratios used most frequently are debt to total assets, times interest earned and fixed charge coverage.

INTERACTIVE

Return on Equity Net income ÷ Stockholder's Equity.

Total Asset Turnover Sales or Services ÷ Total Assets.

Quick Ratio (Current Assets - Inventory) ÷ Current Liabilities.

Times Interest Earned

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7/23/2018http://media.capella.edu/CourseMedia/PUBH5104/RatiosForMeasuring/PubH5104_Financ...

Income before Interest and Taxes ÷ Interest.

Average Collection Period Accounts Receivable ÷ Average daily credit sales and services.

Return on Assets Net income ÷ Total Assets.

Current Ratio Current Assets ÷ Current Liabilities.

Receivables Turnover Sales or Services ÷ Accounts Receivable.

Profit Margin Net income ÷ Sales.

Inventory Turnover Sales or Services ÷ Inventory.

CREDITS Interactive Design: Instructional Designer:

Project Manager:

Tara Schiller

Felicity Pearson

Julie Greeunke

L i c e n s e d u n d e r a C r e a t i v e C o m m o n s A t t r i b u t i o n 3 . 0 L i c e n s e .

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7/23/2018http://media.capella.edu/CourseMedia/PUBH5104/RatiosForMeasuring/PubH5104_Financ...