Capital Budgeting and Profitability Measures Flashcards
What is net working capital?
Net working capital is the difference between non-cash current assets and non-debt current liabilities.
Net working capital. What is it a measure of?
A companies liquidity
Accounts Payable: Income:
Type of ratio
Calculation
What it measures/reflects…
Accounts Payable divided by Annual Income,
Measuring the speed with which a company pays vendors relative to Income.
Numbers higher than typical industry ratios suggest that the company may be using suppliers to float operations.
Current Liabilities: Inventory:
Type of ratio
Calculation
What it measures/reflects…
Current Liabilities divided by Inventory:
A high ratio, relative to industry norms, suggests over-reliance on unsold goods to finance operations.
Current Ratio:
Type of ratio
Calculation
What it measures/reflects…
This is the same as Current Assets divided by Current Liabilities, measuring current assets available to cover current liabilities, a test of near-term solvency. The ratio indicates to what extent cash on hand and disposable assets are enough to pay off near term liabilities. The Quick Ratio is applied as a more stringent test.
Days Payables: 365/(Cost of Sales: Accounts Payable ratio): Reflects the average number of days for each payable before payment is made.
365 / (Cost of Sales: Accounts Payable)
Reflects the average number of days for each payable before payment is made.
Quick Ratio:
Type of ratio
Calculation
What it measures/reflects…
Cash plus Accounts Receivable, divided by Current Liabilities, indicating liquid assets available to cover current debt. Also known as the Acid Ratio. This is a harsher version of the Current Ratio, which balances short-term liabilities against cash and liquid instruments.
Difference between quick ratio and current ratio?
Quick ratio strips out inventory
Accounts Payable Turnover
Type of ratio
Calculation
What it measures/reflects…
Short term liquidity measure
Calculated by taking the total purchases made from suppliers, or cost of sales, and dividing it by the average accounts payable amount during the same period.
Measure used to quantify the rate at which a company pays off its suppliers.
AP Turnover ratio is declining, what does that tell u?
This indicates that the company is paying its suppliers more slowly, and may be an indicator of worsening financial condition.
It could also mean that payment terms with vendors have changed…
Days payable outstanding
solvency ratio
360 days / accounts payable turnover
Shows the average number of days that a payable remains unpaid
Inventory turnover
Calculated by dividing cost of goods sold by average inventory
