● SOLVENCY RATIOS:
1.
Working Capital: provides a quantification of readily available resources.
Ratio not to be less than 2. Aggressive policy: Low ratio, Conservative policy:
High ratio.
= current assets - current liabilities
2.
Current Ratio: provides a measure of short-term debt-paying ability.
= current assets / current liabilities
3.
Quick Ratio 'Acid-Test': provides a stricter measure of short-term debt-paying
ability, measures immediate short-term liquidity
= (cash, temp invest, marketable securities, net
receivables) / current liabilities
4.
Current Cash Debt Coverage Ratio: measures a company's ability to pay off its
current liabilities in a given year from its operations.
= net cash by operating activities / avg current liabilities
● ACTIVITY RATIOS:
1.
Accounts Receivable Turnover: provides a measure of the relative size of the AR balance and the effectiveness of credit policies.
= net credit sales / average accounts receivable 'net'.
2.
Inventory Turnover: measures the relative size of your inventory. High ratio
means: firm not hold excessive stock of unproductive inventories &
inventory is marketable.
= cost of goods sold / average inventory
3.
Asset Turnover: measures how efficiently all assets are used to generate sales
= net sales / average total assets
4.
Average Collection Period: measures the average time taken to collect your A/R
= 360 / accounts receivable turnover
5.
Number of Days' Sales in Inventory: provides an idea of how long it takes to
sell the entire inventory. Lower number is better.
= 360 / inventory turnover
6.
Operating Cycle: the time between inventory acquisition and cash of sales
receipt
= number of days of inventory +
number of days of receivables
