Ratio's extended Flashcards
current ratios
current assets over current liabilities. should be 2:1 or higher. example: $1.89 in assets for ever $1 of current liabilities
quick ratio.
(liquidity ratio). ratio reflects the quality of assets. if debt cant meet all current liabilities. meaning that the company is dependant on inventory and future sales.
net income on sales ratio. (net income ratio)
measures income per $1 in sales. generally 3-7%. if below this, company needs cost cutting or higher prices.
net income to assets. (return on assets)
measures how much income is generated per 1$ of assets, and how effectivly assets are used to generate profit.
net income to equity (return on equity)
measures ROI, how much investment is returned as profit. Defoe earned 65% annually from his ownership. any investor would be happy with this.
debt ratio
an efficiency ratio. which indicates how much assets as financed: creditors or owners. if its a high level - creditors assume risk. in defoes case, creditors have claims to 42cents for every dollar of his assets. so, the higher the number, the more leveraged a company is. implying greater financial risk
debt to net worth ratio. (equity)
measures capital relationships between creditors and owners, what is owed, and what the firm is worth. 1:1 is ideal. Defoe owes 73 per $1 of equity. which is healthy.
times interest earned ratio.
measures ability to make interest payments. a low ratio is 4:1
Dafoes was 12:1 which means he can pay his debts easily.
average inventory turnover ratio
measures how often inventory is used per year. how well inventory is managed. in dafoes case it was 181 days which is not normally very efficient, suggests overstocking or stale/ obsolete inventory.
average collection period ratio.
measures average number of days to collect accounts receivable. only credit sales, never cash. in defoes case his collection average is 43 days.
average payable period ratio.
measures how long it takes to pay up. investors and creditors want to know punctuality . Defoe takes 31 days to pay on average which is excellent
net assets turnover ratio.
measures the relationship of assets to generate sales, how much productively the assets are used. Defoe generates $2.94 per every $1 in assets.
