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Buad 195 - ratios
| Question | Answer |
|---|---|
| profit margin | Net Income/ Sales |
| Profit Margin is important in determining | measures the ability to control cots and to charge respectable prices- of interest to lenders and shareholders |
| Return on Assets | Net Income/ Total Assets |
| Return on Assets in important in determining | efficiently of the us of assets Lower income relative to assets-...IE. Low Sales... BUT could be distorted if NEW assets recently bought. |
| Return on Equity | Net Income/ Shareholder Equity |
| Return on Equity is important in determining | Return on owner investments Of interest to sharholder and investers since this is their share of hte business, weaknesses... based on historical costs of net assets and retained earnings based on PAST results..Make sure to compare to previous years |
| Receivable Turnover | Credit Sales/ Account Receivables |
| Receivable Turnover is importnat in determining | how many times a year receivables accumulate a re received. we want this to be a high ratio- important to short term creditors- collection issues? discounts too high? Interest not high enough? |
| Average Collection Period | 365/ receivable turnover |
| Inventory Turnover | COGS/Inventory |
| Inventory Turnover is important in determining | how many times a in a reayr the inventory is turned over.want it to be high BUT not too high Inventory too high? storage costs too high? Obsolete stock?- |
| Capital Asset Turnover | Sales/Capital Assets |
| Capital assets turnover important why> | shows how capital assets are being efficiently used to generate sales. |
| Total Assest Turnover | Sales/total assets |
| Total Assets Turnover important why | how efficiently all assets are used in generating income |
| Current Ratio | Current assets/Current Liabilities |
| Current Ratio importnat | must be greater than 1 or company is solvent. comforatble 1.5- 2 Very High could indicate a problem collecting receivables or turning over inventory. High AR, Cash or Inventory not really a good thing. |
| Quick Ratio ( ACID TEST) | Current Assets- Inventory/ Current Liabilities |
| ACID TEST important because | A big difference from current ratio proves that inventory is high. common to be low. leaner meaner version of current ratio. |
| Debt to Total Assest | Total Debt/Total Assest |
| Debt to Total Assest important why | we want this to be relatively low- if the ratio is higher it indicates more risk to investors- OF INTEREST TO LONGTERM CREDITORS |
| Times Interest Earned | EBIT/Int Expense |
| TImes Interest Earned important why | how many times a year the company earns enough net income to pay the interest on its debt- HIGHER the BETTER |
Created by:
rebeccafengler
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