Financial Ratios Flashcards
Current Ratio Formula?
Current Assets/ Current Liabilities = x TIMES
Inventory Turnover Formula?
Cost of Goods Sold/ Average Inventory = x TIMES/year
Average Collection Formula?
Accounts Receivable/ (Sales/365) = x DAYS, round up to the nearest day
Debt to Equity Formula?
Total Liabilities/ Shareholders’ Equity = x $, 2 decimals
Return on Sales Formula?
Net Income/ Net Sales = x % or $
Return on Equity Formula?
Net Income/ Total Equity = x % or $
What does the current ratio calculate?
Can you pay the bills? The higher the ratio, the more assurance that debts will be paid. If it’s too high, you’re holding too much cash.
What does the Inventory Turnover calculate?
measures the number of times inventory has been turned over (sold and replaced) – are we making too much stuff or not enough?
What does the average collection calculate?
measure how well a company’s credit and collection policies are working by indicating how long (in days) accounts receivable are converted into cash
The lower (quicker), the better – ideally below 30 days
What does debt to equity calculate?
measure management’s reliance on debt and the business’s indebtedness compared to the amount invested by its owners. Indicates the amount of liabilities the business has for every dollar of shareholder’s equity. Good indicator of a business’s capacity to repay its creditors. The lower, the better – should be below 1.00, ideally below 0.50
What does Return on sales measure?
profit margin - how much profit a business makes for each dollar of sales
What does Return on Equity measure?
how much profit a business makes for each dollar of shareholder investment – higher return, better for the shareholders
