ratios (acct 100 exam 2)

receivables turnover ratio

net credit sales / average net accounts receivable

number of times during a year the average AR balance is collected, shows how effective a company is at granting credit to and collecting from customers, want a higher number

average collection period

365 / receivables turnover ratio

captures the number of days that the average accounts receivable balance is outstanding, want a lower number

inventory turnover ratio

COGS / average inventory

shows the number of times the firm sells its average inventory balance during the period, want higher ratio

average days in inventory

365 / inventory turnover ratio OR (average inventory / COGS) x 365

shows the number of days the average inventory is held, want a lower number

gross profit ratio

gross profit / net sales

measures the amount by which the sale price of inventory exceeds its cost per dollar of sales, want a high ratio

return on assets

net income / average total assets

asset turnover x profit margin

the amount of net income generated for each dollar invested in assets, higher is more profitable, shows profitability in use of assets

profit margin

net income / net sales

indicates the earnings per dollar of sales, want higher number

asset turnover ratio

net sales / average total assets

return on assets / profit margin

measures sales per dollar of assets invested, want high number, shows asset’s efficiency

cash holdings ratio

cash + cash equivalents / total assets

measures amount of cash in relation to total assets, depends

investments to assets ratio

short term + long term investments / total assets

shows how much of a company’s assets are investments, depends

return on investments ratio (ROI)

income/loss from investments / average short term + average long term investments

shows how well investments preform, high ratio indicates large return (better)

net interest margin

interest income - interest expense / total assets

measures difference between interest income and interest expenses

efficiency ratio

non-interest revenue / revenue

shows efficiency of marketing/operational expenses, lower shows there is less non-interest expense per dollar of revenue

A 60% ratio means a bank spends 60 cents for every dollar of revenue earned

provision for credit losses ratio

provision for credit losses / net loans and acceptances

measures a banks ability to cover potential loan losses

what you don’t expect to receive / what you expect to receive

loss ratio

insurance claims paid + loss adjustment expense / total premiums earned

provides insurance companies with overview of financial performance, compares costs paid for claims versus premiums received

expense ratio

total underwriting expense / total premiums earned

measures operational efficiency by company expenses to premium income