Ratios Flashcards
Current ratio =
Current Assets / Current Liabilities
Acid-test ratio =
(cash + accounts receivable) / current liabilities
Days in receivables =
accounts receivable /
annual credit sales / 365
Accounts receivable turnover =
annual credit sales /
accounts receivable
Days in inventory =
inventory /
annual cost of goods sold / 365
Inventory turnover =
cost of goods sold /
inventory
Liquidity
a firm’s ability to pay its bills on time. Liquidity is related to the ease and speed with which a firm can convert its noncash assets into cash, as well as to the size of the firm’s investment in noncash assets relative to its short-term liabilities.
Current ratio
a firm’s current assets divided by its current liabilities. This ratio indicates the firm’s degree of liquidity by comparing its current assets to its current liabilities.
Acid-test (quick) ratio
the sum of a firm’s cash and accounts receivable divided by its current liabilities. This ratio is a more stringent measure of liquidity than the current ratio because it excludes inventories and other current assets (those that are least liquid) from the numerator.
Days in receivables (average collection period)
a firm’s accounts receivable divided by the company’s average daily credit sales (annual credit sales ÷ 365). This ratio expresses how rapidly the firm is collecting its credit accounts.
Accounts receivable turnover ratio
a firm’s credit sales divided by its accounts receivable. This ratio expresses how often accounts receivable are “rolled over” during a year.
days in inventory
inventory divided by daily cost of goods sold. This ratio measures the number of days a firm’s inventories are held on average before being sold; it also indicates the quality of the inventory.
Inventory turnover
a firm’s cost of goods sold divided by its inventory. This ratio measures the number of times a firm’s inventories are sold and replaced during the year (that is, the relative liquidity of the inventories).
Operating return on assets (OROA)
the ratio of a firm’s operating profits divided by its total assets. This ratio indicates the rate of return being earned on the firm’s assets.
Operating profit margin
a firm’s operating profits divided by sales. This ratio serves as an overall measure of operating effectiveness.