Ch 4, Module 3 Flashcards
working capital
current assets - current liabilities
liquidity ratio
current ratio
= current assets / current liabilities
liquidity ratio
quick ratio
= (cash + ST marketable securities + net receivables) / current liabilities
OR
= CA - inventory / CL
only includes more liquid components
operating cash flow ratio
= CF from ops / ENDING CL
measures how much cash a company generates from operating activities to cover CL
Working capital turnover
= sales / avg working capital
evaluate the money used to fund the co’s ops and sales derived from ops
how is the company doing at converting working capital into sales
activity ratios relates to…
how efficient a co is at utilizing its resources to generate sales and profits
days in inventory
= end inventory / (COGS / 365)
how many days it takes to convert inventory to sales
days sales in AR
= End net AR / (Net sales / 365)
days of payables outstanding
= end AP / (COGS / 365)
too low means you might not be taking full advantage of credit terms
this should be as long as the payment terms will allow
cash conversion cycle
= days in inventory + days sales in AR - days of payables outstanding
debt to equity ratio
total liabilities / total equity
want to get this ratio close to the industry average
total debt ratio
= total liabilities / assets
times interest earning
aka interest coverage ratio
= EBIT / interest expense
gross margin
(net sales - COGS) / net sales
profit margin
= NI / Sales
