8 Asset Turnover Sales / Average Total Assets Measures sales generated by each Times dollar of assets invested. The higher the ratio, the more sales is created from assets. 9 Return on Total Assets Net Income/ Average Total Assets Measures how well assets are utilized by the company % 10 Return on Equity Net Income/Average Total Equity Measure indicates the company's ability to earn income for common stockholders. % Compute the following ratios: # Metric 1 Current Ratio Formula Meaning Expressed Current Year Numerator Denominator Answer as 1 Year Ago Numerator Denominator Answer Metric Improved / Worsened Ratio:1 Current Assets / Current Measures the short-term Liabilities 2 Quick Ratio (Cash + Short Term 3 Day Sales Outstanding 4 Days in Inventory Investments + Accounts Receivable) / Current Liabilities (Accounts Receivable/ Sales)*365 (Inventory / Cost of goods sold)*365 5 Debt Equity Ratio Total Liabilities / Total Equity debt-paying ability of the company. A higher current ratio suggests a strong ability to meet current obligations. This ratio is like the current ratio but Ratio:1 excludes current assets such as inventories and prepaid expenses that may be difficult to quickly convert into cash Measures how quickly a company collects its accounts receivable. A lower number is better as it converts AR to cash quicker # of days Measure inventory liquidity. A high # of days. number indicates too much inventory and a low number indicates a potential stock out Measures what portion of a company's assets are contributed by creditors. A higher number indicates higher leverage and lower capacity to use debt in the future Ratio 6 Times Interest earned Net Income before interest & income tax / Interest Exp Measure of a company's ability to pay interest expense. A higher number indicates lower risk of default Times 7 Net Profit Margin Net Income / Sales Measures net income generated from sales. The higher the ratio, the more profit is created from sales. %

8 Asset Turnover Sales / Average Total Assets Measures sales generated by each Times dollar of assets invested. The higher the ratio, the more sales is created from assets. 9 Return on Total Assets Net Income/ Average Total Assets Measures how well assets are utilized by the company % 10 Return on Equity Net Income/Average Total Equity Measure indicates the company's ability to earn income for common stockholders. % Compute the following ratios: # Metric 1 Current Ratio Formula Meaning Expressed Current Year Numerator Denominator Answer as 1 Year Ago Numerator Denominator Answer Metric Improved / Worsened Ratio:1 Current Assets / Current Measures the short-term Liabilities 2 Quick Ratio (Cash + Short Term 3 Day Sales Outstanding 4 Days in Inventory Investments + Accounts Receivable) / Current Liabilities (Accounts Receivable/ Sales)365 (Inventory / Cost of goods sold)365 5 Debt Equity Ratio Total Liabilities / Total Equity debt-paying ability of the company. A higher current ratio suggests a strong ability to meet current obligations. This ratio is like the current ratio but Ratio:1 excludes current assets such as inventories and prepaid expenses that may be difficult to quickly convert into cash Measures how quickly a company collects its accounts receivable. A lower number is better as it converts AR to cash quicker # of days Measure inventory liquidity. A high # of days. number indicates too much inventory and a low number indicates a potential stock out Measures what portion of a company's assets are contributed by creditors. A higher number indicates higher leverage and lower capacity to use debt in the future Ratio 6 Times Interest earned Net Income before interest & income tax / Interest Exp Measure of a company's ability to pay interest expense. A higher number indicates lower risk of default Times 7 Net Profit Margin Net Income / Sales Measures net income generated from sales. The higher the ratio, the more profit is created from sales. %

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter7: Analysis Of Financial Statements

Section: Chapter Questions

Problem 1Q: Define each of the following terms: Liquidity ratios: current ratio; quick, or acid test,...

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