Term
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Definition
| Provide information about a business' ability to meet its short term obligations. Includes the current ratio and quick ratio and sometimes a cash ratio. |
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Term
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Definition
Current Assets / Current Liabilities
A high ratio reduces a creditor's risk. |
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Term
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Definition
Current assets - Inventory / Current Liabilities
(Inventory could be difficult to liquidate so this ratio excludes it.) This is often referred as an acid test. |
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Term
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Definition
Cash + Marketable Securities / Current Liabilities
Reflects a business' ability to pay off liabilities if it was necessary |
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Term
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Definition
Indicate how efficiently a business utilizes its assets.
2 most common are Receivables Turnover and Inventory Turnover. |
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Term
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Definition
Annual Credit Sales / Accounts Receivable
Indication of how quickly a firm collects its receivables - it is reported in # of days (collection period). |
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Term
| Average Collection Period |
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Definition
| Accounts Receivable / (Annual Credit Sales / 365) |
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Term
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Definition
| Cost of Goods Sold / Average Inventory |
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Term
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Definition
| Average Inventory / (Annual Cost of Goods Sold - 365) |
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Term
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Definition
Offer various measures of success -
Include Gross Profit Margin, Return on Assets and Return on Equity |
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Term
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Definition
(Sales - Cost of Goods Sold) / Cost of Goods Sold
Measure of the gross profit margin earned on sales |
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Term
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Definition
Net Income / Total Assets
Measure how effectively a firm's assets are being used |
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Term
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Definition
Net Income / Shareholder Equity
Measures the profits earned per each $ invested in stock |
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Term
| Financial Leverage Ratios |
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Definition
Provide an indication of long term solvency
Include Debt Ratio and Debt-to-Equity Ratio
and sometimes Interest Coverage Ratio |
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Term
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Definition
| Total Debt / Total Assets |
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Term
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Definition
| Total Debt / Total Equity |
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Term
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Definition
Earnings Before Interest and Taxes / Interest Charges
Indicates how well the firm's earnings can cover the interest payments on debt |
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Term
| Income Statement Equation |
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Definition
Revenue
-Cost of Goods Sold
=Gross Profit
-Operating Expenses
=EBIT
-Interest Expense
=EBT
-Taxes
=Net Income |
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