BUS 2530 - Ratio Analysis
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25 Terms
Ratios provide what
clues about underlying conditions
Ratios facilitate comparison of
one company over time
one company vs other companies
Ratios are used by:
Lenders (determine creditworthiness)
stockholders (estimate future cash flows and risk)
managers (identify areas of weakness and strength)
Three classifications of ratios
liquidity
profitability
solvency
Liquidity ratios measure:
the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash
Liquidity Ratios
current ratio
acid-test (quick) ratio
receivables turnover ratio
average collection period
inventory turnover ratio
average days in inventory
current ratio
current assets/current liabilities
acid test ratio
(current assets-inventory)/current liabilities
receivables turnover ratio
(net credit sales)/accounts receivable
average collection period
365 days/receivables turnover ratio
inventory turnover ratio
COGs/average inventory
average days in inventory
365 days/inventory turnover ratio
solvency ratios provide information about:
a company’s debt-paying ability
solvency ratios
debt to total assets ratio
times interest earned ratio
debt to total assets ratio
total debt/total assets
times interest earned ratio
(EBIT) earning before interest expense and income taxes/interest expense
profitability ratios measure
the income or operating success of a company for a given period
return on equity ratio (ROE)
net income/total equity
return on assets ratio
net income/total assets
profit margin ratio
net income/net sales
asset turnover ratio
net sales/total assets
three types of comparisons that increase the usefulness on financial information:
intracompany basis (time series)
industry averages
intercompany basis
intracompany basis
comparisons within a company are often useful to detect changes in financial relationships and significant trends
industry averages
comparisons with industry averages provide information about a company’s relative position with the company
intercompany basis
comparisons with other companies provide insight into a company’s competitive position