Chapter 4 Flashcards
Inventory Turnover Ratio
sales/inventories
shows how many times an asset was turned over/restocked
What does a low inventory turnover ratio indicate?
The firm is holding too much inventory
low rate of return
inventory may not be worth their stated value
Quick(Acid Test)
current assets-inventories/current liabilities
measures firms ability to pay off hort term debt without relying on the sales of inventory
Current Ratio
current assets\current liabilities
a low current ratio indicates that current liabilities are rising faster than current assets
Daily Sales Outstanding
receivables\annual sales/365
measures the time a firm must wait after making a sale to collect the cash
high number means that customers are not paying on time
if late customers default then they receivables end up as bad debt and are never collected
Fixed Asset Turn Over Ratio
sales/net fixed assets
measures how effectively a firm is using its plant and equipment
total assets turnover ratio
sales/total assets
measures the turnover of ALL assets
low means that not enough sales are being generated
If you wanted to evaluate a firms DSO, with what could you compare it?
The credit terms
How might different ages distort comparisons of different firms fixed asset turnover ratios?
Because fixed assets are recorded at their historical cost-depreciation, and inflation has cused many assets value to be understated an old firms ratio will be higher.
debt management ratios
measure how effectively a firm manages its debt
A firm that is unleveraged has…
no debt
A firm that is leveraged has …
some leverage
ROE
rate of return
Total Debt to Total Capital Ratio (debt ratio)
total debt/total debt+equity
Total debt includes: short term and long term interest bearing debt
measures the percentage of the firms capital provided by the debtholders
Why might shareholders want more leverage?
because it can magnify expected earnings
