Question

Select 15 ratios to use at year end and give a description and example of each.

Answer 1

1. Current ratio

Ratio of company's current assets to its current liabilities

current assets = $900

current liabilities = $1000

Current ratio = $900/$1000 = 0.9

The company would be able to cover 90% of its current liabilities

2. Cash ratio

Ratio of company's cash and short-termmarketable securities to its current liabilities

cash and short-term marketable securities = $300

current liabilities = $1000

Cash ratio = $300/$1000 = 0.3

The company would be able to cover 30% of current liabilities through its cash and short-term marketable securities

3. Asset turnover

Measures the effectiveness of a company to generate revenues from its total assets

net revenues = $900

average total assets =$1200

Asset turnover = $900/$1200 = 0.75

The company generates $0.75 for every $1 of its assets

4. Inventory turnover

Measures the effectiveness of a company's inventory management and is calculated by taking the ratio of costs of goods sold to average inventory

costs of goods sold =$500

average inventory = $300

Inventory turnover = $500/$300 = 1.67

For the period of one year, the inventory was replenished 1.67 times

5. Receivables turnover

Measures the efficiency of a company to collect its outstanding bills

net revenue = $1000

average receivables = $125

Receivables turnover = $1000/$125 = 4

Receivables were collected once every 46 days (365/4)

6. Payables turnover

Measures the ability of a company of how quickly it can payoff the bills owed to suppliers

purchases = $500

average payables = $100

Payables turnover = $500/$100 =5

The company paid of the bills owed once every 73 days (365/5)

7. Debt to assets ratio

Measures the percentage of company's total assets raised through debt financing

total liabilities = $750

total assets = $1000

Debt to assets ratio = $750/$1000 = 0.75

Total liabilities of company accounts for 75% of total assets

8. Debt to capital ratio

Measures the amount of company's liability and equity provided by debt

Total debt = $550 (short term+longterm debts)

total capital = $1000 (total debt+shareholder's equity)

Debt to capital ratio = $550/$1000 = 0.55

55% of total capital is provided by debt financing

9. Debt to equity ratio

Measures the amount of debt used by the company to finance its assets relative to shareholder's equity

total debt =$550

total shareholder's equity = $450

Debt to equity ratio = $550/$450 = 1.22

Company uses debt of $1.24 to finance its assets fro every dollar of shareholder's equity

10. Interest coverage ratio

Measures the ability of a company of how easily it can pay its interest expenses on outstanding debt

Earnings before interest and taxes = $250

interest payments = $100

Interest coverage ratio = $250/$100 = 2.5

Company's earnings before interest and taxes is 2.5 times its interest payments for the given period

11. Gross Profit margin

Ratio of a company's gross income to its net revenue

gross income = $600

net revenue = $1000

Gross Profit margin = $600/$1000 = 0.6

Company pays for COGS with 60% of revenues generated

12. Operating Profit margin

Ratio of company's operating income to its net revenue

operating income =$200

net revenue = $1000

Operating Profit margin = $200/$1000 = 0.2

$0.20 is operating profit for every dollar of revenue generated

13. Net Profit margin

Ratio of company's net income to its net revenue

net income =$120

net revenue = $1000

Net Profit margin = $120/$1000 = 0.12

For every dollar of revenue generated, value created for shareholders is $0.12

14. Return on Assets

Measures the efficiency of a company to utilize its assets

net income =$120

total assets =$1200

ROA = $120/$1200 =0.1

For every dollar of company's assets, it is generating $0.10 in net income

15. Return on Equity

Measures the dollar amount profit of a company for every dollar of shareholder's equity

net income = $120

total shareholder's equity = $450

ROE = $120/$450 = 0.27

Company is generating $0.27 in net income for every dollar of shareholder's equity