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    Business Finance

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    Ansel Salde
    The current ratio measures a company's ability to pay short-term debts with its current assets by dividing current assets by current liabilities. A ratio of 2:1 or higher is preferred. The quick ratio is a more stringent test of liquidity, using only the company's most liquid current assets. Accounts receivable turnover shows how efficiently a company collects money owed by customers. Days' sales in inventory indicates how quickly inventory is converted to sales, with a lower number being more efficient.

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    Business Finance

    Uploaded by

    Ansel Salde
    9 views3 pages
    The current ratio measures a company's ability to pay short-term debts with its current assets by dividing current assets by current liabilities. A ratio of 2:1 or higher is preferred. The quick ratio is a more stringent test of liquidity, using only the company's most liquid current assets. Accounts receivable turnover shows how efficiently a company collects money owed by customers. Days' sales in inventory indicates how quickly inventory is converted to sales, with a lower number being more efficient.

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    The current ratio measures a company's ability to pay short-term debts with its current assets by dividing current assets by current liabilities. A ratio of 2:1 or higher is preferred. The quick ratio is a more stringent test of liquidity, using only the company's most liquid current assets. Accounts receivable turnover shows how efficiently a company collects money owed by customers. Days' sales in inventory indicates how quickly inventory is converted to sales, with a lower number being more efficient.

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    © All Rights Reserved
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    9 views3 pages

    Business Finance

    Uploaded by

    Ansel Salde
    The current ratio measures a company's ability to pay short-term debts with its current assets by dividing current assets by current liabilities. A ratio of 2:1 or higher is preferred. The quick ratio is a more stringent test of liquidity, using only the company's most liquid current assets. Accounts receivable turnover shows how efficiently a company collects money owed by customers. Days' sales in inventory indicates how quickly inventory is converted to sales, with a lower number being more efficient.

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    What is the Current Ratio?

    The current ratio measures the ability of an organization to pay its bills in the near-term. It is a common
    measure of the short-term liquidity of a business. The ratio is used by analysts to determine whether
    they should invest in or lend money to a business. To calculate the current ratio, divide the total of all
    current assets by the total of all current liabilities. The formula is:

    Current assets ÷ Current liabilities = Current ratio

    Since the ratio is current assets divided by current liabilities, the ratio essentially implies that current
    liabilities can be liquidated to pay for current assets. A current ratio of 2:1 is preferred, with a lower
    proportion indicating a reduced ability to pay in a timely manner.

    Example of the Current Ratio

    A supplier wants to learn about the financial condition of Lowry Locomotion. The supplier calculates the
    current ratio of Lowry for the past three years:

    The sudden rise in current assets over the past two years indicates that Lowry has undergone a rapid
    expansion of its operations. Of particular concern is the increase in accounts payable in Year 3, which
    indicates a rapidly deteriorating ability to pay suppliers. Based on this information, the supplier elects to
    restrict the extension of credit to Lowry.

    What Is the Quick Ratio?

    The quick ratio is an indicator of a company’s short-term liquidity position and measures a company’s
    ability to meet its short-term obligations with its most liquid assets.

    Since it indicates the company’s ability to instantly use its near-cash assets (assets that can be converted
    quickly to cash) to pay down its current liabilities, it is also called the acid test ratio. An "acid test" is a
    slang term for a quick test designed to produce instant results.

    Quick assets are defined as the most liquid current assets that can easily be exchanged for cash. For
    most companies, quick assets are limited to just a few types of assets:

    Quick Assets = Cash+CE+MS+NAR

    where: CE = Cash equivalents

    MS = Marketable securities
    NAR = Net accounts receivable

    What is the Accounts Receivable Turnover Ratio?

    Accounts receivable turnover is the number of times per year that a business collects its average
    accounts receivable. The ratio is used to evaluate the ability of a company to efficiently issue credit to its
    customers and collect funds from them in a timely manner. It is one of the most important measures of
    collection efficiency.

    What is day sales in accounts receivable?

    Day sales in accounts receivables is a measure of the average number of days it takes a business to
    collect payments following a sale. The days sales—also called days sales outstanding (DSO)—is a metric
    that can be calculated on a monthly, quarterly or yearly basis. The DSO can be calculated with the
    following formula:

    DSO = (accounts receivable) / (total credit sales) x (number of days in given time period)

    In the formula, the accounts receivable is divided by the credit sales for a specified number of days, and
    then multiplied by that number of days. The result is the days sales average, which can give insight into
    how a business generates cash flow.

    What Is Inventory Turnover?

    Inventory turnover refers to the amount of time that passes from the day an item is purchased by a
    company until it is sold. One complete turnover of inventory means the company sold the stock that it
    purchased, less any items lost to damage or shrinkage.Inventory turnover is the rate that inventory
    stock is sold, or used, and replaced. The inventory turnover ratio is calculated by dividing the cost of
    goods by average inventory for the same period. A higher ratio tends to point to strong sales and a
    lower one to weak sales.

    What is Days’ Sales in Inventory?

    Days' sales in inventory (DSI) indicates the average time required for a company to convert its inventory
    into sales. A small number of days' sales in inventory indicates that a company is more efficient at selling
    off its inventory, while a large number indicates that it may have invested too much in inventory, and
    may even have obsolete inventory on hand. However, a large number may also mean that management
    has decided to maintain high inventory levels in order to achieve high order fulfillment rates.

    What is Profit Margin?

    Profit margin is the measure of a business, product, service's profitability. Rather than a dollar amount,
    profit margin is expressed as a percentage. The higher the number, the more profit the business makes
    relative to its costs.

    What is Return on Net Worth?


    Return on net worth indicates the profitability of the company by providing the picture of how much
    return it earns on its capital. It shows whether or not the company is efficient enough to grow its
    network every year for the future growth potential of the company.

    What is Return on Total Assets?

    The return on total assets compares the earnings of a business to the total assets invested in it. The
    measure indicates whether management can effectively utilize assets to generate a reasonable return
    for a business, not including the effects of taxation or financing issues.

    The concept is useful for comparison purposes. For example, an outside analyst can compare the return
    on total assets of a number of competitors in the same industry to determine which one is reporting the
    most efficient asset usage in comparison to earnings.

    What is Vertical Analysis?

    Vertical analysis is the proportional analysis of a financial statement, where each line item on the
    statement is listed as a percentage of another item. This means that every line item on an income
    statement is stated as a percentage of gross sales, while every line item on a balance sheet is stated as a
    percentage of total assets.

    What is Horizontal Analysis?

    Horizontal analysis is the comparison of historical financial information over a series of reporting
    periods. It is used to see if any numbers are unusually high or low in comparison to the information for
    bracketing periods, which may then trigger a detailed investigation of the reasons for the difference.

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