Question

What is EBITDA? How does it compare to operating income? Which is likely to be the largest? Identify and discuss several liquidity ratios? Current ratio, quick ratio? Can the quick ratio ever be greater than the current ratio? Profitability ratios? Gross margin?

Answer 1

Answer:

1.EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company's overall financial performance and is used as an alternative to simple earnings or net income in some circumstances. EBITDA, however, can be misleading because it strips out the cost of capital investments like property, plant, and equipment.

Simply put, EBITDA is a measure of profitability. While there is no legal requirement for companies to disclose their EBITDA, according to the U.S. generally accepted accounting principles (GAAP), it can be worked out and reported using the information found in a company's financial statements.

The earnings, tax, and interest figures are found on the income statement, while the depreciation and amortization figures are normally found in the notes to operating profit or on the cash flow statement. The usual shortcut to calculate EBITDA is to start with operating profit, also called earnings before interest and tax (EBIT) and then add back depreciation and amortization.

2.Operating Income vs EBITDA are slightly different than each other. Yes, Operating Income vs EBITDA are indicate the profit made by the company. EBITDA shows the profit including interest, tax, depreciation, and amortization. But operating income tells the profit after taking out the operating expenses like depreciation and amortization.

3.EBITDA will be the largest as it did not deduct Interest, Tax and Depreciation.

4.Liquidity ratios are an important class of financial metrics used to determine a debtor's ability to pay off current debt obligations without raising external capital. Liquidity ratios measure a company's ability to pay debt obligations and its margin of safety through the calculation of metrics including the current ratio, quick ratio, and operating cash flow ratio.

Different types of liquidity ratios:

1.The current ratio measures a company's ability to pay off its current liabilities (payable within one year) with its current assets such as cash, accounts receivable and inventories. The higher the ratio, the better the company's liquidity position:

2.The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets and therefore excludes inventories from its current assets. It is also known as the "acid-test ratio":

3.Daily sales outstanding refers to the average number of days it takes a company to collect payment after it makes a sale. A higher DSO means that a company is taking unduly long to collect payment and is tying up capital in receivables. DSOs are generally calculated quarterly or annually:

5.No, quick ratio can never be greater than current ratio. The current ratio is always greater.