Financial Ratios

Question 1

Financial Ratios:

Cash Conversion Cycle

Answer 1

Time that cash is held up.

Time products held in inventory
\+
Time to collect receivables
-
Average time payable

Shorter the cash conversation cycle, the better

Question 2

Financial Ratios:

Inventory Holding Period

Answer 2

Average time that a product is held in inventory

Avg. Time in Inventory = Inven./Avg. time COGS
Ex.
inventory = $8,450
Weekly COGS = (33,800/52) = 650
Avg. Weeks in Inventory = 8,450/650 = 13
Weeks = 13

Question 3

Financial Ratios:

Inventory Turnover

Answer 3

of times you can sell out and restock inventory

Inventory Turnover - COGS/Inventory
Ex. COGS = $33,800 Inven. = $8,480
Turnover = $33,800/8,480 = 4
Inventory turned over 4 times annually.

Question 4

Financial Ratios

Average Time Payable

Answer 4

This is the average time is requires firm to pay suppliers for materials purchased on credit

related: [acnts payable inventory] – [COGS]
ratio: [acnts payable]/[COGS]

ex. time payable (in weeks)
2,600/33,800 = 0.0769
0.0769*52 = 4

It takes on average 4 weeks to pay suppliers.

Question 5

Accounts Receivable Collection Period

Answer 5

Average amount of time to collect payments

related: [accounts receivable] – [Sales Revenue]

[accounts receivable]/[sales revenue] = A/R collection ratio

ex. collection period (in weeks)
5,000/52,000 = 0.0961
0.0961*52 = 5

Takes 5 weeks on average to collect receivables

Question 6

Gross Margin Percentage

Answer 6

This is the percentage of each dollar sold the company keeps for profit:

GMP = gross revenue / sales revenue

ex. 18,200 (gross profit from sales) /52,000 (how much customers paid you) = 0.35

So 35 cents of each dollar sold will go into the company’s profit

Question 7

Inventory Holding Period

Answer 7

This is the average amount of time the product is held in inventory.

related accounts: inventory – COGS

ratio - [inventory]/[COGS]

ex. avg. Weeks in Inventory:
8,450/33,800 = 0.25
0.25*52 = 13
Inventory is held on average for 13 weeks.

Question 8

Debt Ratio

Answer 8

Measure the extent to which a company is leveraged

DR = Total Liabilities / Total Assets

• The higher the ratio, the more is the company is leveraged
• More than 100% = more liabilities than assets
• Generally 40% or lower is the benchmark

Question 9

Debt / Equity

Answer 9

Percentage of balance sheet financed by suppliers, lenders and creditors against investments

[total liabilities] / [total equity]

Lower %, company has stronger equity position

Question 10

Quick Ratio

Answer 10

(Acid-test Ratio)

Quick Assets (highly liquid and can be converted into cash in 90 days):

• Cash
• Short-term investments
• accounts receivable
• excludes inventory

[quick assets] / [current liabilities]

Benchmark = $1.00

Question 11

Current Ratio

Answer 11

Measures company’s ability to pay short-term and long-term obligations

Compare Current assets against current liabilities
[current assets]/[current liabilities]

Like the Quick Ratio but INCLUDES inventory

Company with a ratio less than 1 cannot meet its obligations if all due at once.

Question 12

Times Interest Earned

Answer 12

A metric used to measure a company’s ability to meet its debt obligations

[income available]/[interest expense]

benchmark = 4
* income available usually found in I/S under “operating income”

income available = [gross profit] - [general admin expenses] - [depreciation] - [impairment]