Term
Liquidity Analysis
Gross Profit Ratio
How much $ is profit in comparison to Net Sales |
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Definition
Gross Profit Ratio
Gross Profit
------------
Net Sales |
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Term
Liquidity Analysis
Profit Margin Ratio
Shows management’s ability to
control expenses, by telling how
much $ per $1 is income. |
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Definition
Profit Margin Ratio
Net Income
----------
Net Sales |
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Term
Liquidity Analysis
Working Capital Ratio
The excess of current assets over
current liabilities at a point in
time. Important to keep a good
balance of these two. |
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Definition
Working Capital Ratio
Current Assets – Current Liabilities |
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Term
Liquidity Analysis
Current Ratio
2:1 is considered desirable.
Compares dollar to dollar assets
and liabilities. |
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Definition
Current Ratio
Current Assets minus
Current Liabilities |
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Term
Liquidity Analysis
Acid Test (Quick Ratio)
Tests a company’s ability to pay
its debts as they are due. It
excludes inventory and
prepayments from the numerator.
1:1 is desirable. |
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Definition
Acid-Test (Quick Ratio)
Cash + Current Receivables + MS
-------------------------------
Current Liabilities |
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Term
Liquidity Analysis
Cash Flow from Operations to Current Liabilities
A measure of the ability to pay current debts from operating activities |
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Definition
Cash Flow from Operations to Current Liability
Net Cash From Operating Activities
----------------------------------
Average Current Liabilities |
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Term
Liquidity Analysis
A.R. Turnover Ratio
How many times accounts
receivables are collected in a
period. Measures how efficient
the collection process is. |
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Definition
A.R. Turnover Ratio
Net Credit Sales
-----------------
Average Accounts Receivables |
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Term
Liquidity Analysis
Determines the average length of
time an account was outstanding. |
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Definition
Accounts Receivable Turnover
Number of Days’ Sales in Receivable
-----------------------------------
Number of Days in Period |
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Term
Liquidity Analysis
Inventory Turnover Ratio
Measures how efficient inventory
is managed. Determines how
many times inventory is sold
during a period. |
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Definition
Inventory Turnover Ratio
Cost of Goods Sold (Cost of Sales)
----------------------------------
Average Inventory |
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Term
Liquidity Analysis
Number of Days’ Sales in Inventory
Determines how long it takes to
sell inventory. Another way of
measuring the efficiency of
inventory management. |
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Definition
Number of Days’ Sales in Inventory
Number of Days in Period
------------------------
Inventory Turnover |
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Term
Liquidity Analysis
Cash to Cash Operating Cycle
The length of time from the
purchase of inventory to the
collection of receivables from the
sale. |
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Definition
Cash to Cash Operating Cycle
Number of Days’ in Inventory + Number of
Days’ in Receivables |
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