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Quick Ratio (L)

A higher quick ratio (current asset - prepayments - inventory/ liability) shows that business are capable of covering its short term liability; reduced reliance on inventory to meet obligations

• . Strong Liquidity Position

  • The company is very capable of meeting short-term debts without relying on inventory sales.

Receivable turnover (L) (days)

An increase in receivables turnover (365 days/ receivable turnover) means the company is collecting cash from customers more frequently throughout the year, which is positive for cash flow and reduces the risk of bad debts.

Receivables turnover - Credit Sales/Average account receivables

may be due to

• stricter credit policies

• efficient collection procedures (i.e: entity follows up with overdue payments)

• offering incentives (discounts) for paying early

Inventory turnover (L)

A higher inventory turnover (cost of sales /average inventory ) indicates the business is selling and replacing inventory more rapidly, which is a sign of strong sales or efficient inventory management.

May be due to

• Higher customer demand

• Efficient inventory management by not overstocking

Inventory turnover.. average days in inventory. (L)

Lower average days in inventory means inventory (365 days/inventory turnover) is sold more quickly, which is usually preferable (may be due to a drop in selling price)

Debt ratio (S)

The higher the ratio (total liabilities/total assets) , the greater the financial risk that the entity may not be able to meet its maturing obligations

May be due to

• earning less income

• more interest-bearing liabilities

Interest coverage ratio (S)

The higher the coverage (EBIT/Interest expense) , the more lenient creditors will be in lending money.

• Higher coverage may be due to low debt ratio

Return on Equity (P)

The higher the return on equity, the more profit earned for each dollar invested (Profit available / Average ordinary shareholder equity)

• May be due to higher net income

or efficient use of equity capital.

Return on Assets (P)

A high Return on Assets (ROA) indicates that a company is efficiently using its assets to generate profit. (Profit after tax/ average total assets)

Profit margin (P)

The higher the profit margin, the more money the business earns which results in profit (Profit after tax/Net sales)

May be due to

• increased selling price

• reduced expenses . 

Gross profit margin (P)

The higher the profit margin, the more money the business earns in sales which results in gross profit (Gross profit/Net sales)

• This may suggest that increasing selling prices (or finding less expensive suppliers) has helped the business to generate improved returns.

Quick Ratio (L)

A higher quick ratio (current asset - prepayments - inventory/ liability) shows that business are capable of covering its short term liability; reduced reliance on inventory to meet obligations

. Strong Liquidity Position - The company is very capable of meeting short-term debts without relying on inventory sales.

Asset Turnover

The higher the asset turnover, the more efficient asset is used to generate income. (Net sales/ Average total asset). Can happen from increased sales or decreased assets.