AEM 2225 PRELIM 2 Key Ratios

Inventory Turnover Ratio

=COGS/Average Inventory(Ending Inventory from previous year + Ending inventory from current year). Measures how many times average inventory was produced and sold Higher ratio indicates that inventory moves more quickly through the production process to the ultimate customer Higher ratio is good because extra cash invested Sudden decline in the ratio may signal that a company is facing an unexpected drop in demand or is becoming sloppy in production management

Gross Profit Percentage

=Gross Profit/ Net Sales. Measures how much of every sales dollar is gross profit Reflects a company's ability to product goods and services at low cost (decrease COGS) and charge premium prices (increase net sales) Higher gross profit results in higher net income

Receivables Turnover Ratio

=Net Sales/ Average Net trade accounts receivable(Beginning net trade accounts receivable + Ending net trade accounts receivable). Measures how many times average trade receivables are recorded and collected Higher the ratio, faster the collection of receivables Higher ratio is good because extra cash can be invested Sudden decline in the ratio may signal that a company is not collecting receivables as rapidly

Fixed Asset Turnover Ratio

=Net Sales/Average net fixed assets(fixed assets from previous year + fixed assets from current year(net of accumulated depreciation)). Measures the sales dollars generated by each dollar of fixed asset Used to assess a company's effectiveness in generating sales from its long-lived assets (higher rate is better) Declining rate may indicate that a company is expanding in anticipation of higher future sales Increasing rate may signal a company has cut back on capital expenditures