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Buad 195 - ratios

QuestionAnswer
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 on 2014-02-02



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