Question

In your own words define the following key terms:

Current Ratio

Days Cash on Hand (DCOH)

Days Receivables

Liquidity Ratios

Operating Margin

Profitability Ratios

Quick Ratio

Answer 1

a) Current ratio = Current assets / Current liabilities

It helps to measure the ability of the company to pay ita short term dues within a year or obligations.

b) Days cash on hand = (Cash on hand / (Operating expenses - Non cash expenses)) * 365 days

It shows that number of days company can pay its operating expenses with the given amount of cash in hand & with no other source of income like sales.

c) Days recievables = (Debtors / Sales) * 365 days

It indicates the company's effectivenss towards credit & its collection efforts from customers.

d) Liquidity ratio = It is the ratio which indicates that how fast company can convert its current assets into cash & pay off its current liabilities on time. It includes current ratio, quick ratio, absolute liquidity ratio, etc.

e) Operating margin = Operaring profit / Sales

It indicates percentage of operating profit generated through sales. It is also called as EBIT ie. earnings before interest & tax.

f) Profitability ratio = Gross or Net profit / Sales

It indicates the profitability of the company or ability to generate the profit. It includes gross profit ratio & net profit ratio.

g) Quick ratio = (Current assets - Inventory) / Current liabilities

It is same as current ratio but this ratio indicates how quick company can pay off its short term liabilities with quick assets excluding inventory.