Financial Accounting Ratio Analysis

current ratio

can the company pay off its current debts with its current assets

quick ratio

can the company convert immediate obligations with READILY CONVERTIBLE ASSETS

(think of things that can be liquidated quickly Ex: AR but NOT inventory

cash ratio

can you pay off all your liabilities with just your cash so that you don’t have to liquidate all of your other assets

receivable turnover

measures how efficiently a company collects payments from customers who buy on credit, indicating how quickly outstanding debts are converted into cash. 

Days sales outstanding (DSO)

How long it takes a company to collect its accounts receivables

• we want a lower DSO because that means we’re getting our money faster

• do we have more cash or credit sales

inventory turnover

how many times are we turning our inventory - are our sales strong - do we have good marketing

Days sales of inventory (DSI)

how many days does it take to turn our inventory

• the smaller the DSI the better

• But we have to remember it TRULY depends on the company

  • Ex: Zara v Ford (Zara is going to have a smaller DSI)

Payable Turnover

how many times are we able to pay off our AP’s

• do we even have enough cash on hand to pay off our short-term obligations

Days payable outstanding

how many days per period does it take us to pay off our bills

High DPO = taking a long time to pay off bills (our suppliers are gonna hate us)

cash conversion cycle

how much time it takes us to sell our inventory, pay the bills, and receive our money

Price/Earnings

how valuable are our shares

dividend yield

how much are we paying our dividends each year RELATIVE to the stock price

• a higher yield = lower stock price

• a lower yield = higher stock price

Gross Profit Margin

how healthy is our company

• Higher GPM = WE”RE MORE PROFITABLE

operating margin (ROS)

how much we make AFTER we pay our operating expenses but not taxes

• AKA how much revenue we have left over after paying the bills

Debt to Equity (D/E)

how much are we paying our bills with debt