Ratio Analysis Flashcards
What is Liquidity?
(solvency) measures the ability of a firm to pay its obligations as they become due.
Working Capital equation
Current assets - current liabilities
Working capital ratio
current assets / current liabilities
Acid test ratio
(quick ratio) measure of an entitys ST liquidity, it measures the number of times that cash and assets can be converted quickly to cash to cover current liabilities.
(cash + net receivables + marketable securities) / current liabilities
What actions would increase the quick ratio?
selling obsolete inventory because it would increase cash without affecting the denominator of current liabilties
Solvency is used to assess a firm’s ….
ability to pay its debts as they become due
Defensive interval ratio
Measure of how long available cash and other highly liquid assets could support normal cash requirements
cash + net receivables + marketable securities / avg daily cash expenditures
avg collection period
days in years x avg AR / credit sales for period
Times interest earned ratio
net income + interest expense + income tax expense / interest expense
Times preferred dividends earned ratio
net income / annual preferred dividend obligation
How do you calc the operating cycle length?
inventory conversion cycle + the AR conversion cycle
OR
AP conversion + cash conversion
What is the operating cycle?
the avg length of time between the acquisition of inventory and the collection of cash from the sale of that inventory.
How do you calc the cash cycle?
operating cycle (Inventory conversion + AR conversion) - AP conversion cycle
What is the inventory turnover formula?
COGS/avg inventory. = inventory turnover
COG = beg inv + purchases - end inv
Avg inventory = (Beg inv + end inv.)/2
What is the AR turnover formula?
Net credit sales / avg net AR.
beg + end / 2
