Question

In: Finance

1.                 Define with words the following ratios: A.            Liquidity (do each individually - cu

1.                 Define with words the following ratios:

A.            Liquidity (do each individually - current ratio, quick ratio, days cash on hand, days receivables)

B.             Solvency (Debt Service Coverage Ratio)

C.            Profitability (do each individually -  Total Margin, Operating Margin, Return on Total Assets)

Solutions

Expert Solution

A, Liquidity Ratios: In general, these ratios will be useful in determining the company's ability to pay the liabilities which are of short term.

Current Ratio = It is the ratio of Current Assets to the Current Liabilities.It tells us about the working capital condition in the company.

Current Ratio = Current Assets/Current Liabilities

Quick Ratio: This is the ratio of (cash, marketable securities and Receivables of company) to the current liabilities.

This ratio is more helpful in finding liquidity as it is eliminating the Inventories , which were taken into consideration in Current Ratio.

Quick Ratio = (Cash+Marketable Securities+Receivables)/Current Liabilities

Days Cash on Hand:

It talks about the ability of the company that maximum number of days it can continue to pay its for its expenses, given the amount of cash available at hand.

Days Cash on Hand = Cash available/(Operational expences - Depreciation costs) * 365

Days Receivables: On an average, how many days a company needs to collect payments on the goods it already sold.

B. Solvency Ratios: these ratios deal with the company's ability to meet its long term obligations.

Debt Service Coverage ratio: The ability of the company to service its debt through the net income it has.

DSCR = EBITDA/(Principal debt+Interest)

C. Profitability Ratios: Deals with the overall performance of the firm or the company in terms of the profits, revenue and equity.

Total Margin: On a broad scale, it is the ratio of Net Income to the Revenue. This tells us about the level of profits available with the company.

Total Margin = Net Income/Revenue

Operating Margin: It excludes the Depreciation and amortization expenses. Ratio of Operating Income ( EBIT ) to Revenue of the company.

= EBIT/Revenue

Return on Total Assets: Ratio which measures the profitability in terms of the assets employed in order to achieve the income. This is the ratio of Net Income to Average total Assets.

= Net Income/Average Total Assets


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