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3. Cash Ratio
Cash Ratio = cash / current liabilities The cash ratio (cash and marketable securities to current liabilities ratio) measures the immediate amount of cash available to satisfy short term debt.
5. Current Ratio
Current ratio = current assets / current liabilities. The current ratio is used to evaluate the liquidity, or ability to meet short term debts. High current ratios are needed for companies that have difficulty borrowing on short term notice. The generally acceptable current ratio is 2:1 The minimum acceptable current ratio is 1:1 The current ratio is included in all the ratio calculating programs, which provide formula, definition and calculation of each ratio.
The debt service coverage ratio shows the ability to meet annual interest and debt repayment obligations. A debt service coverage ratio of less than 1:1 means that it does not have sufficient income to meet its debt demands.
9. Quick Assets
Quick Assets = cash + marketable securities + accounts receivable. Quick assets are the amount of assets that can be quickly converted to cash. Quick assets are used to determine the quick ratio and days of liquidity ratio.
A quick ratio of 1:1 is considered satisfactory unless the majority of "quick assets" are in accounts receivable and the company has a pattern of collecting accounts receivable slower than paying accounts payable.
Working capital is the liquid reserve available to satisfy contingencies and uncertainties. A high working capital balance is needed if the business is unable to borrow on short notice. Banks look at working capital over time to determine a company's ability to weather financial crises. Loans often specify minimum working capital requirements
A high ratio indicates that a company's liquidity position is improved because net profits result in liquid funds.
Efficiency Ratios
1. Accounts Receivable Turnover Ratio
Accounts Receivable Turnover Ratio = annual credit sales / average accounts receivable This is the ratio of the number of times that accounts receivable amount is collected throughout the year. A high accounts receivable turnover ratio indicates a tight credit policy.
A low or declining accounts receivable turnover ratio indicates a collection problem, part of which may be due to bad debts
An increasing age of inventory ratio indicates a risk in the company's inability to sell its products. Individual inventory items should be examined for obsolete or overstocked items. A decreasing age of inventory may represent under-investment in inventory. The Age of Inventory Ratio is also referred to as the Number of Days Inventory, Days Inventory or Inventory Holding Period.
Collection Period =
The average collection period calculation uses the average accounts receivable over the sales period. The collection period or average collection period must be compared to competitors to see whether the credit given, and customer risk, is in line with the industry. A high collection period shows a high cost in extending credit to customers.
Individual inventories should be looked at to find areas where the inventory, and inventory holding period, can be reduced. The average inventory period should be compared to competitors
7. Breakeven Point
Breakeven Point = fixed costs / contribution margin. The breakeven point is the point at which a business breaks even (incurs neither a profit nor a loss) The breakeven point is the minimum amount of sales required to make a profit. Increasing breakeven points (period to period) indicates an increase in the risk of losses.
The cash breakeven point indicates the minimum amount of sales required to contribute to a positive cash flow.
The cash turnover ratio indicates the number of times that cash turns over in a year.
Revenue per employee (net sales per employee) = net sales / number of employees This ratio indicates the average revenue generated per person employed.
Payment Period to Average Inventory Period = payment period / average inventory period A payment period to average inventory period above 1:1 (100%) indicates that the inventory is sold before it is paid for (inventory does not need to be financed). (The average inventory period is also known as the inventory holding period)
Profitability Ratios
Contribution margin is the amount generated by sales to cover fixed costs. The contribution margin ratio indicates the percent of sales available to cover fixed costs and profits. Current Return on Training and Development Current Return on Training and Development = increase in productivity and knowledge contribution / training costs This ratio is a general indicator of the current return on training and development.
The operating margin ratio determines whether the fixed costs are too high for the production volume.
A low return on assets ratio indicates that the earnings are low for the amount of assets. The return on assets ratio measures how efficiently profits are being generated from the assets employed. A low return on assets ratio compared to industry averages indicates inefficient use of business assets.
Turnover Ratio
1. Accounts Payable Turnover Ratio
Accounts Payable Turnover Ratio = total supplier purchases / average accounts payable The accounts payable turnover ratio shows the number of times that accounts payable are paid throughout the year. A falling accounts payable turnover ratio indicates that the company is taking longer to pay its suppliers.
Leverage Ratios
1. Capital Acquisition Ratio
Capital Acquisition Ratio = (cash flow from operations - dividends) / cash paid for acquisitions. The capital acquisition ratio reflects the company's ability finance capital expenditures from internal sources. A ratio of less than 1:1 (100 %) indicates that capital acquisitions are draining more cash from the business than it is generating.
The capital employment ratio shows the amount of sales which owner's investment in operations generates.
8. Debt Ratio
Debt Ratio = liabilities / assets The debt ratio is also known as the debt to capital ratio, debt to equity ratio or financial leverage ratio. The debt ratio shows the reliance on debt financing. A high debt ratio is unfavorable because it indicates that the company is already overburdened with debt.
Equity Multiplier = total assets / shareholders equity. The equity multiplier ratio discloses the amount of investment leverage.
Fixed coverage = earnings before interest and taxes / fixed charges before taxes. The fixed coverage ratio indicates the ability of a business to pay fixed charges (fixed costs) when business activity falls.
Debt to Equity Ratio is also referred to as Debt Ratio, Financial Leverage Ratio or Leverage Ratio. The debt to equity (debt or financial leverage) ratio indicates the extent to which the business relies on debt financing. Upper acceptable limit of the debt to equity (debt or financial leverage) ratio is usually 2:1, with no more than one-third of debt in long term. A high financial leverage or debt to equity ratio indicates possible difficulty in paying interest and principal while obtaining more funding.
2. Cash Flow for Investing to Cash Flows from Operating and Financing
Cash Flow from Investing to Operating and Financing = cash flows from investing / (cash flows fro operations + cash flows from financing) This ratio compares the funds needed for investment to the funds obtained from financing and operations. The ratio of cash flow for investing to cash flows from financing and operations is included in the financial statement ratio analysis spreadsheets highlighted in the left column, which provide formulas, definitions, calculation, charts and explanations of each ratio.
The cash flow for investing vs. financing compares funds needed for investment to the funds obtained from financing and operations
A ratio of less than 1:1 (100%) indicates that debt is structured to be repaid quicker than the company has the ability to.
8. Net Cash
Net Cash = net profit + depreciation + amortization Net cash is also called cash flow. It reflects how much cash the business generates.
11. Operations Cash Flow Plus Fixed Charges to Fixed Charges Ratio
Operations Cash Flow Plus Fixed Charges to Fixed Charges = (cash flow from operations + fixed cost) / fixed costs This ratio indicates the risk involved when business activity, and ability to pay fixed costs, falls.
This ratio indicates the cash actually available to meet interest charges. A ratio of less than 1:1 (100%) indicates insufficient cash flow is being generated to meet current interest payments.
Sales Ratios
1. Sales to Accounts Payable Ratio
Sales to Accounts Payable = Sales / accounts payable A high sale to accounts payable ratio indicates the inability to obtain short-term credit on the form of cost-free funds to finance sales growth.
Sales to Current Assets = sales / current assets A high sale to current assets ratio indicates deficient working capital.
9. Trend in Sales
Trend in Sales is the rate at which sales are increasing or decreasing The trend in sales is also referred to as the sales trend.
in the firm's assets, whether the dollar came from investors or creditors. A low net income to assets ratio indicates that the earnings are low for the amount of assets. The net income to assets ratio measures how efficiently profits are being generated from the assets employed. A low net income to assets ratio compared to industry averages indicates inefficient use of business assets.
This ratio shows the relationship between operating income and amount of wages and salaries paid. A declining trend indicates a narrowing of margins and is a cause for concern.
Labor Ratios
1. Change in Employment Ratio
Change in Employment = increase/(decrease) in the number of employees
This ratio shows how many more (fewer) employees the company has than the previous year.
Shows the extent to which Labor costs are fixed. A low percent is preferred, especially in industries with volatile demands or seasonality.
This ratio indicates the extent to which Labor costs must be absorbed into sales prices.
Percent Change in People Employed = (the change in the number of employees) / number of employees in previous year) x 100%
The equipment replacement ratio indicates whether the company is spending sufficient funds on replacing assets.
Long Term Return on Training and Development = increase in productivity and knowledge assets / training costs This ratio is a general indicator of the long term return on training and development. An average of several years' ratios should be used to compensate for training and development cost fluctuations.
Repairs and Maintenance to Associated Assets = repairs and maintenance / fixed assets A decreasing trend may indicate a company's failure to maintain capital facilities.
The percent export revenue indicates the sales volume risk associated with currency risks.
Investment Ratios
2. Dividend Yield
Dividend Yield = annual dividends per share / price per share. The dividend yield is the yield a company pays out to its shareholders in terms of dividends.
The earnings per share growth rate indicate the amount of growth for investors. This ratio helps determine the multiplier used in calculating the company's market value. A higher ratio yields a higher multiplier. The trend in this ratio indicates whether growth is steady , sporadic, accelerating or declining.
A decrease in the price earnings ratio (P/E ratio) may indicate a lack of confidence in the company's ability to maintain earnings growth.
Dividend Ratios
1. Cash Dividend Coverage Ratio
Cash Dividend Coverage = (cash flow from operations) / dividends. The cash dividend coverage ratio reflects the company's ability to meet dividends from operating cash flow. A cash dividend coverage ratio of less than 1:1 (100 %) indicates that dividends are draining more cash from the business than it is generating.
3. Dividend Yield
Dividend Yield = annual dividends per share / price per share. The dividend yield is the yield a company pays out to its shareholders in terms of dividends.
A ratio above 0.1:1 (10%) is of concern because it indicates that advertising is not generating over 10 times its cost in sales
2. Altman z-score
Z-score = 1.2 a + 1.4 b + 3.3 c + d+.6 f E Where: a = working capital, b = retained earnings, c = operating income, d = sales, e = total assets, f = net worth and g = total debt The Altman z-score is a bankruptcy prediction calculation. The z-score measures the probability of insolvency (inability to pay debts as they become due). 1.8 Or less indicates a very high probability of insolvency. 1.8 to 2.7 indicates a high probability of insolvency. 2.7 to 3.0 indicate possible insolvency. 3.0 Or higher indicates that insolvency is not likely. g
3. Audit Ratio
Audit Ratio = audit costs / sales
A high audit ratio indicates that more audit time was required because of problems with the company's accounting records or control procedures.
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