Financial Ratios pt. 1 (20.2)

Question 1

Describe activity ratios

Answer 1

Activity ratios. This category includes several ratios also referred to asset utilization or turnover ratios (e.g., inventory turnover, receivables turnover, and total assets turnover). They often give indications of how well a firm utilizes various assets such as inventory and fixed assets.

Question 2

describe liquidity ratios

Answer 2

Liquidity ratios. Liquidity here refers to the ability to pay short-term obligations as they come due.

Question 3

describe sovlency ratios

Answer 3

Solvency ratios. Solvency ratios give the analyst information on the firm’s financial leverage and ability to meet its longer-term obligations.

Question 4

describe profitability ratios

Answer 4

Profitability ratios. Profitability ratios provide information on how well the company generates operating profits and net profits from its sales.

Question 5

describe valuation ratios

Answer 5

Valuation ratios. Sales per share, earnings per share, and price to cash flow per share are examples of ratios used in comparing the relative valuation of companies.

Question 6

receivables turnover & days sales outstanding

Answer 6

receivables turnover= annual sales / average receivables

days of sales outstanding, which is the average number of days it takes for the company’s customers to pay their bills:

days of sales outstanding=365 / receivables turnover

Question 7

inventory turnover & days inventory on hand

Answer 7

inventory turnover= cost of goods sold / average inventory

days of inventory on hand=365 / inventory turnover

Question 8

payables turnover & number of days payables

Answer 8

A measure of the use of trade credit by the firm is the payables turnover ratio:

payables turnover=purchases / average trade payables

number of days of payables=365 / payables turnover ratio

Question 9

total asset turnover

Answer 9

total asset turnover=revenue / average total assets

Question 10

fixed asset turnover

Answer 10

fixed asset turnover=revenue / average net fixed assets

Question 11

working captal turnover

Answer 11

working capital turnover=revenue / average working capital

Question 12

defensive interval ratio

Answer 12

The defensive interval ratio is another measure of liquidity that indicates the number of days of average cash expenditures the firm could pay with its current liquid assets:

defensive interval=(cash+marketable securities+receivables) / average daily expenditures

Question 13

The cash conversion cycle - define and calculate

Answer 13

The cash conversion cycle is the length of time it takes to turn the firm’s cash investment in inventory back into cash, in the form of collections from the sales of that inventory. The cash conversion cycle is computed from days sales outstanding, days of inventory on hand, and number of days of payables:

cash conversion cycle = days sales outstanding + days of inventory on hand - number of days of payables