Financial Statement Analysis Midterm Stanton/Stevens

Current Ratio

• A liquidity ratio measures a company's ability to pay short-term obligations with current assets.

• 1.5-2.0 is a good range; if its too low, start worry; if its too high, it may indicate inefficiency in using assets but is typically a good sign of liquidity.

• management: can they maintain it, working capital planning

Quick Ratio

• A liquidity ratio that measures a company's ability to meet its short-term obligations with its most liquid assets.

• More restrictive than the current ratio, and it backs out inventory since we can’t sell all the inventory very quickly.

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Cash Ratio

A liquidity measure that indicates a company's ability to cover its short-term liabilities with cash and cash equivalents.

Total Debt Ratio

A solvency ratio that indicates the proportion of a company's assets that are financed by debt.

Debt-Equity Ratio

A measure of a company's financial leverage calculated by dividing its total liabilities by shareholders' equity.

Equity Multiplier

A financial leverage ratio that measures the total assets owned by a company per dollar of shareholders' equity.

Times Interest Earned (TIE)

A measure of a company's ability to meet its debt obligations; calculated by dividing earnings before interest and taxes (EBIT) by interest expense.

Cash Coverage Ratio

A measure that assesses a company’s ability to pay interest on outstanding debt using cash flow.

Inventory Turnover

A ratio that measures how many times a company's inventory is sold and replaced over a period.

Days in Inventory

The average number of days that inventory is held before being sold.

Receivables Turnover

A measure of how efficiently a company uses its assets; it calculates how many times a company collects its average accounts receivable in a period.

Days Sales Outstanding (DSO)

The average number of days that it takes a company to collect payment after a sale has been made.

Total Asset Turnover

A ratio that measures the efficiency of a company's use of its assets in generating sales revenue.

Gross Profit Margin

A profitability ratio that shows the percentage of revenue that exceeds the cost of goods sold.

Operating Profit Margin