RATIO ANALYSIS
Financial ratios help external stakeholders, and enterprise managers know how well or poorly a business is performing and pinpoint areas that could do with improvement. Companies can also compare themselves to the competition or to diverse companies in other industries. Size need not be an issue since ratios standardize accounting relationships to provide management with a raw reckoning of financial status and trends.
To better categorize them, financial ratios are generally divided into seven principal classes:
• LIQUIDITY RATIOS,
• ACTIVITY RATIOS,
• LEVERAGE/CAPITAL STRUCTURE RATIOS,
• COVERAGE RATIOS,
• PROFITABILITY RATIOS,
• MARKET PROSPECTS RATIOS, AND
• EARNINGS QUALITY
LIQUIDITY RATIOS
Current Ratio gauges the firm’s …show more content…
It measures how effectively your company is managing its working capital. The shorter the cash conversion cycle, the better the company is managing working capital, because cash is tied up for a relatively shorter period.
Think back to the last time we discussed Cash Flow.
What dimension does this add to that discussion?
We first need to convert the turnover measures (as previously done) to number of days.
Average Collection Period (ACP) (Days) = 365/receivables turnover ratio
Average Inventory Turnover Period (AIP) (Days) = 365/inventory turnover ratio
Average Payables Turnover Period (APP) (Days) = 365/payables turnover ratio
Calculate the Cash Conversion Cycle using the following formula:
CCC = ACP + AIP − APP
(Where ACP is average days of receivables outstanding, AIP is average days of inventory outstanding and APP is average days of payables outstanding)
You do: input formulas for the Gross Profit Margin, Net Profit Margin, Return on Assets, Return on Shareholders ' Equity, & Cash Conversion Cycle Pro Forma Balance Sheet
I want all ratios in the same location on your spreadsheet.
ASSESSING EARNINGS
Financial ratios help external stakeholders, and enterprise managers know how well or poorly a business is performing and pinpoint areas that could do with improvement. Companies can also compare themselves to the competition or to diverse companies in other industries. Size need not be an issue since ratios standardize accounting relationships to provide management with a raw reckoning of financial status and trends.
To better categorize them, financial ratios are generally divided into seven principal classes:
• LIQUIDITY RATIOS,
• ACTIVITY RATIOS,
• LEVERAGE/CAPITAL STRUCTURE RATIOS,
• COVERAGE RATIOS,
• PROFITABILITY RATIOS,
• MARKET PROSPECTS RATIOS, AND
• EARNINGS QUALITY
LIQUIDITY RATIOS
Current Ratio gauges the firm’s …show more content…
It measures how effectively your company is managing its working capital. The shorter the cash conversion cycle, the better the company is managing working capital, because cash is tied up for a relatively shorter period.
Think back to the last time we discussed Cash Flow.
What dimension does this add to that discussion?
We first need to convert the turnover measures (as previously done) to number of days.
Average Collection Period (ACP) (Days) = 365/receivables turnover ratio
Average Inventory Turnover Period (AIP) (Days) = 365/inventory turnover ratio
Average Payables Turnover Period (APP) (Days) = 365/payables turnover ratio
Calculate the Cash Conversion Cycle using the following formula:
CCC = ACP + AIP − APP
(Where ACP is average days of receivables outstanding, AIP is average days of inventory outstanding and APP is average days of payables outstanding)
You do: input formulas for the Gross Profit Margin, Net Profit Margin, Return on Assets, Return on Shareholders ' Equity, & Cash Conversion Cycle Pro Forma Balance Sheet
I want all ratios in the same location on your spreadsheet.
ASSESSING EARNINGS