Financial Ratios

Quick Ratio

A liquidity ratio that measures the ability of a company to pay its current liabilities when they come due with only quick assets. Quick assets are current assets that can be converted to cash within 90 days or in the short-term. Cash, cash equivalents, short-term investments or marketable securities, and current accounts receivable are considered quick assets. The acid test ratio measures the liquidity of a company by showing its ability to pay off its current liabilities with quick assets. If a firm has enough quick assets to cover its total current liabilities, the firm will be able to pay off its obligations without having to sell off any long-term or capital assets.

Difference between acid-test and current ratio

Current ratio - examines liquidity of a company and its ability to pay short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). (Current assets/current liabilities) The quick ratio, on the other hand, is a liquidity indicator that filters the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. The quick ratio, also called the "acid-test ratio," is calculated by adding cash & equivalents, marketable investments and accounts receivables, and dividing that sum by current liabilities. The main difference between the current ratio and the quick ratio is that the latter offers a more conservative view of the company's ability to meets its short-term liabilities with its short-term assets because it does not include inventory and other current assets that are more difficult to liquidate (i.e., turn into cash). By excluding inventory (and other less liquid assets) the quick ratio focuses on the company's more liquid assets.

Asset Turnover

Efficiency ratio that shows how efficiently a company can use its assets to generate sales. Higher turnover ratios mean the company is using its assets more efficiently. Lower ratios mean that the company isn't using its assets efficiently and most likely have management or production problems.

Profit Margin Ratio

Efficiency ratio that shows what percentage of sales are left over after all expenses are paid by the business. This ratio also indirectly measures how well a company manages its expenses relative to its net sales.

Job and Process costing

Job costing involves the detailed accumulation of production costs attributable to specific units or groups of units. Process costing involves the accumulation of costs for lengthy production runs involving products that are indistinguishable from each other. Uniqueness of product. Job costing is used for unique products, and process costing is used for standardized products. Size of job. Job costing is used for very small production runs, and process costing is used for large production runs. Record keeping. Much more record keeping is required for job costing, since time and materials must be charged to specific jobs. Process costing aggregates costs, and so requires less record keeping.

Days in Inventory

Measures the number of days it will take a company to sell all of its inventory. This calculation also shows the liquidity of inventory. Shorter days inventory outstanding means the company can convert its inventory into cash sooner. In other words, the inventory is extremely liquid. Along the same line, more liquid inventory means the company's cash flows will be better.

Return on assets

Profitability ratio that measures how efficiently a company can manage its assets to produce profits during a period. Basically measures how profitable a company's assets are.

Return on Equity Ratio

Profitability ratio that measures the ability of a firm to generate profits from its shareholders investments in the company. Measures how efficiently a firm can use the money from shareholders to generate profits and grow the company.

Current Ratio

The current ratio is a liquidity and efficiency ratio that measures a firm's ability to pay off its short-term liabilities with its current assets. A higher current ratio is always more favourable than a lower current ratio because it shows the company can more easily make current debt payments.

Debt to Equity Ratio

The debt to equity ratio is a financial, liquidity ratio that compares a company's total debt to total equity. The debt to equity ratio shows the percentage of company financing that comes from creditors and investors. A lower debt to equity ratio usually implies a more financially stable business. Companies with a higher debt to equity ratio are considered more risky to creditors and investors than companies with a lower ratio.

Difference between operating and gross profit margin

The difference between them is that gross profit margin only figures in the direct costs of production, while operating profit margin takes into account additional costs commonly referred to as "overhead." Gross profit margin is calculated by looking at revenue minus the cost of goods required for production.

Purpose of financial statement anaylsis

Tto examine past and current financial data so that a company's performance and financial position can be evaluated and future risks and potential can be estimated. Financial statement analysis can yield valuable information about trends and relationships, the quality of a company's earnings, and the strengths and weaknesses of its financial position.

What is the difference between vertical analysis and horizontal analysis?

Vertical analysis reports each amount on a financial statement as a percentage of another item. The restated amounts are known as a common-size income statement. A common-size income statement allows you to compare your company's income statement to another company's or to the industry average. Horizontal analysis looks at amounts on the financial statements over the past years. This allows you to see how each item has changed in relationship to the changes in other items. Horizontal analysis is also referred to as trend analysis.