Question

Statement of the Assignment:

Please prepare a comprehensive list of financial ratios as introduced in Chapter 3 of the textbook. Write a brief explanation below each financial ratio, e.g. what does the financial ratio measures or what the significance of it is.

For example:

Current Ratio = Current Assist / Current Liabilities

Current ratio measures whether our current assets, if liquidated, are sufficient to pay all of our current liabilities. A CR of 1.5, for example, shows that if we were to liquidate all of our current assets, we will be able to cover 1.5x our current liabilities, whereas a CR of 0.5 shows that liquidating our current assets only covers half of our current liabilities.

FINANCIAL RATIOS I WANT : A Write a brief explanation below each financial ratio, e.g. what does the financial ratio measures or what the significance of it is.

Short-term solvency, or liquidity, measures

• Current ratio = current assets/ current liabilities

• Quick ration = Current assets – inventory / current liabilities

Other liquidity Ratios

• Cash ratio = Cash/ Current Liabilities
• Net Working Capital to Total Assets = Net working Capital / Total Assets
• Interval Measure= Current assets / Average daily operating costs

Long term Solvency Measures

• Total assets – total equity / total assets
• Debit- equity ratio = total debt / total equity
• Equity multiplier = total assets / total equity

• Long term debt ratio = long term debt / long term + total equity

• Tomes interest earned ratio = EBIT / Interest
• Cash coverage ratio= EBIT + Depreciation / interest

Asser management, Or turnover, measures

• Inventory turnover = Cost of goods sold / inventory
• Receivables Turnover = sales / accounts receivable

• NWC turnover= sales / NWC
• Fixed asset turnover = sales/ net fixed assets
• Total asset turnover = sales/ total assets

Profitability measures

• Profit margin = Net income/ sales
• Return on Assets= Net income / total assets
• Return on equity = net income / total equity

Market Value Measures

• EPS = net income/ Shares outstanding
• PE= price per share / earning per share
• Market to book ratio= market value per share / book value per share
• Enterprise value= total market value of the stock + book value of liabilities – cash
• EBITA Ration= enterprise value/ EBITDA

Answer 1

Solution:

1. Short-term solvency, or liquidity, measures:

a) Current ratio = current assets/ current liabilities

This ratio indicates ability of the company to meet its short term obligations.Higher is better.

b) Quick ration = Current assets – inventory / current liabilities

This Ratio takes into consideration Quick Assets in calculation of Ratio which includes cash or current assets which  can be easily converted into cash, therefore Inventory is deducted.

Other liquidity Ratios

c) Cash ratio = Cash/ Current Liabilities

This Ratio Indicates cash position of the company to meet its short term liability, higher ratio indicates cash rich and highly liquid company .

d) Net Working Capital to Total Assets = Net working Capital / Total Assets

This is proportion of Working Capital to Total Assets

Indicates working capital position of the company.Higher ratio indicates better working capital position to smoothly run the business.

e)Interval Measure= Current assets / Average daily operating costs

This indicates no of days company can operate without use of non current Assets.