Econ 118 Final - Fulkerson

Current Ratio

• Current Assets/Current Liabilities

• good if >1

• is there enough assets to cover obligations coming due

Quick Ratio

• (cash and cash equivalents + short term investments + AR) / current liabilities

• acid test ratio

• indicate how much of the assets that can be quickly turned to cash can cover upcoming obligations

• asset threshold = 90 days

Operating Cash Flow to Current Liabilities Ratio

Cash Flow from Operations/avg current liabilities

AR turnover

Sales/Avg AR

Inventory Turnover

COGS/avg inventory

AP turnover

purchases/Avg AP

Liabilties to Assets Ratio

total liabilites/total assets

Liabilities to Shareholder’s Equity Ratio

Total Liabilities/Total shareholder’s Equity

Long term debt to long term capital ratio

Long term debt / (long term Debt + total SE)

Long Term Debt to SE ratio

Total Long Term Debt/Total SE

Interest Coverage Ratio

(EBIT + NCI)/Interest Expense

Operating Cash Flow to total Liabilities Ratio

cash flow from operations / avg total liabilities

Rule for Ratios that use both I/S and B/S accounts

• avg balance sheet account

• apples to oranges

• because I/S is overtime and B/S is point in time, you must avg B/S acct

working capital ratios

• AR turnover

• inventory turnover

• AP turnover

Financial Position

• liquidity and solvency ratios

Collateral

• when banks have priority to your assets if you don’t pay loans

• assets including: inventory and real estate

• types of assets are specified in the agreement

Is debt bad?

• not always

• depends, but can be if you are using it to cover costs

• good: used to expand business

Liquidity/liquidity ratios

• short term/near term

• in this moment

Solvency

• long-term

• incorporates future elements

• examines firm’s ability to make interst and principal payments on LT debt and similar obligations

Financial flexibility

• financial position

• profitability/cash flows

• how well they manage money

• how well they utilize money to generate profits and rev

Fulkerson’s perspective on ratios

• theres a long list

• tailor to your purpose

what are the most common liquidity ratios

• current ratio

• quick ratio

• turnover ratios

• operating cash flow ratios

operating cash flow ratios

• compare if operating cash flow is enough to cover liabilities

Common Solvency Ratios

• liabilities to assets

• liabilities to SE

• Debt to Equity

• Interest Coverage Ratio

What method can you use to understand Debt Ratios

3 = 2 + 1

What you need to consider when interpreting financial stmt ratios

• definition of industry and what is “normal”

• industry average

• distribution of ratios around mean

• definition of financial statement ratios

• consider what the company has done in the past

share price of company

• future or forcasted cash value of the company

• if share price of company = liquidation value —> BAD

Going Concern

Things that are huge red flags