Pearse a seal of Financial Ratios Ratio Liquidity: Current Ouick or aci-test, Cash flow liquidity Average collection period Days inventory held ‘Days payable outstanding Cash conversion or net trade cycle 256 (Current arses ~ inventory ‘Current liabilities (Cash + marketable securities “cash flow from operating Carrent Hablies Net accounts receivable Net sales!365, ___ Inventory ‘Rverage daly cost of sales ‘Accounts payable __ ‘Rrerage daily cost of ses ‘Average collection period + days inventory eld ~ days payable outstanding Significance Measures short-term liquidity, the ability of firm to meet needs forcash as they arise, ‘Measures short-term liquidity ‘more rigorously than the current ratio by eliminating inventory, ‘asualy the least quid current aset “Measures short-term liquidity by considering as cash resources (numerator cash plus cash ‘equivalents plus cath flow from operating activities Indicates days required to, convert receivables into cis Indicates days required tose inventory Indicates days required to pay suppliers. Indicates the days in the normal ‘operating eele or cash conversion cycle of firm,APPENDIX A Summary of Financial Ratios. 257 Activity: ‘Accounts receivable turnover Net sales Netaccounts receivable Inventory turnover Cost of goods sold Taveniories Payables tumover Cost of goods sold “Accounts payable Fixed eset turnover Net sales Netpropery plant-and ‘equipment ‘otal asset mover Net sales "lal assets Leverage: Debt ratio ‘Tal ibiitios ‘Total assets Long-term debt to total Long-term debt capitalization Long-term debt ++ stockholders’ equity Debt to equity ‘Total abilities Flockhotders equity Financial leverage index Return on equity ‘Rejusied return on arse ‘Times interest earned + Operating profit Tinterest expense Cash interest coverage Cash flow from operating ‘ctvities + interest paid + taxes paid Tnterest paid Fixed charge coverage Operating profit + lease payments Interest expense + lease payments Cash flow adequacy, Cash flow from operating ativities Capital expenditures + debt repayments + dividends paid Indicates how many times receivables are collected during ayear,on average Measures effcieny ofthe firm in managing and selling inventory Measures efficiency of the fim in paying suppliers Measures efficiency ofthe frm in managing xed assets “Measures efficiency of the firm in managing all assets. ‘Shows proportion ofall assets that ae financed with debt. ‘Measures the extent to which long-term debtis used for permanent financing. “Measures debt relative to equity bas Indicates if firm is employing sdb succesfully. ‘Measures how many times interest expense is covered by ‘operating earnings. ‘Measures how many times interest payments are covered by ‘ash flow from operating activities “Measures coverage capability ‘more broadly than times interest earned by including ‘operating ease payments as fixed expense ‘Measures how many times ‘capital expenditures debt repayments, and cash dividends are covered by operating cath flow.258 APPENDIX A Summary of Financial Ratios, Profitability: Gross profit margin Gross prot Netsles (Operating profit margin Operating profit ‘Net sales Eectve tax rate Income taxes ‘Earnings before incor taxes Net profit [Net profit margin | Netsalee Cash flow margin (Cash low from operating activities ‘Net sales ‘Return on total assets Net earings “Total astets Return on equity Net earnings Tiockholders equity (Cash return on assets Cash low from operating activities "Total astets Market: Earnings per common share Neteaenings “Average common shares ‘outstanding “Market price of common stock "Earnings per share Price to esenings Dividend payout Dividends per share "Earnings per share Dividends per share ‘Market price of common stock Dividend yield Measures profit generated ster consideration of cost ‘of products sold ‘Measures profit generated after consideration of operating expenses. ‘Measure the percentage the ‘company recognizes as tax ‘Measures profit generated after consideration ofall expenses and revenues, Measures the ability of the firm to generate cath from sales. ‘Measures overall ficiency of firm in managing asets and generating profits ‘Measures rate of return oa stockholders’ (owners) ‘Measures the retura on assets fon a cath basi Shows return to common Sock shareholders for each share owned, Expresses a multiple thatthe stock market places ona firm's earings Shows percentage of earnings Paid to shareholders. Shows the rate earned by shareholders from dividends relative to current price of stock.