| liquidity ratios | measure the relationships between a firms liquid (or current) assets and its current liabilities |
| current ratio | The broadest liquidity measure- measures the dollars of current assets available to pay each dollar of current liabilities. |
| Inventories are | – least liquid of a firm’s current assets- current asset for which book values are least reliable measures of market value |
| They are the current assets on which.. | losses are most likely to occur- if firm must sell inventory to pay upcoming bills, they will most likely have to discount it in order to liquidate |
| Acid test measures | a firm’s ability to pay off short-term obligations without relying on inventory sales |
| Cash ratio | measures a firm’s ability to pay short term obligations with its available cash and marketable securities |
| asset management ratios | measure how efficiently a firm uses its assets – (inventory, accounts receivable, and fixed assets), – how efficiently the firm managers its accounts payable |
| Allows managers and investors to… | evaluate whether a firm is holding a reasonable amount of each type of asset and whether management uses each type of asset to effectively generate sales |
| Inventory management | decide the trade off between the advantages of holding sufficient levels of inventory to keep production process going versus the costs of holding large amounts of inventory. |
| Inventory turnover | Measures the number of dollars of sales produced per dollar of inventory |
| Days sales in inventory | Measures the number of days that inventory is held before the final product is sold |
| A/r management | Managers must consider the trade-off between the advantages of increased sales by offering customers better terms – versus the disadvantages of financing large amounts of accounts receivable |
| Average collection period (ACP) | Measures the number of days accounts receivable are held before the firm collects cash from the sale |
| Accounts receivable turnover | measures the number of dollars of sales produced per dollar of accounts receivable |
| Accounts payable management | Managers must consider the trade-off between maximizing the use of free financing that raw material suppliers offer versus the risk of losing the opportunity to buy on account. |
| Average payment period (APP) | Measures the number of days that the firm holds account payable before it has to extend cash to pay for its purchases.- high |
| Accounts payable turnover | – Measures the dollar cost of goods sold per dollar of accounts payable- low |
| Fixed asset turnover | measures the number of dollars of sales produced per dollar of fixed assets- high |
| Sales to working capital | measures number of dollars of sales produced per dollar of net working capital – high |
| Note about fixed assets | age of a firm’s fixed assets will affect the fixed asset turnover ratio level- firm with newer fixed assets will have a lower fixed asset turnover ratio |
| total asset turnover | measures number of dollars of sales produced per dollar of total assets- high |
| capital intensity | measures dollars of total assets needed to produce a dollar of sales- low |
| The more debt a firm uses as a percentage of total assets… | the greater is its financial leverage |
| debt management ratios | measure the extent to which the firm uses debt versus equity to finance its assets |
| debt ratio | measures the percentages of total assets financed with debt |
| debt to equity | measures dollars of debt financing used for every dollar of equity financing |
| Equity multiplier | measures dollars of assets on the balance sheet for every dollar of equity financing |
| The lower of all those three ratios, | the less debt and more equity a firm uses to finance its assets |
| When firms do well | financial leverage creates more cash flows to share with stockholders- magnifies the return to the stockholders of the firm |
| Times interest earned | measures number of dollars of operating earnings available to meet each dollar of interest obligations on the firms debt |
| Fixed-charge coverage | measures number of dollars of operating earning available to meet firm’s interest obligation and other fixed charges |
| cash coverage | measures number of dollars of operating cash available to meet each dollar of interest and other fixed charges the firm covers |
| Managers, investors and anaylsts can determine… | whether a firm has taken on too much debt by using these three ratios |
| A value of one for these ratios | means that 1 dollar of earnings or cash is available to meet each dollar of interest or fixed charge obligations |
| The higher these ratios… | the more equity and less debt the firm uses to finance its assets |
| Profitability ratios | ratios that show the combined effects of liquidity, asset management, and debt management on the firms overall operating costs- best known ratios |
| firm values (or stock prices) react… | quickly to unexpected changes in these ratios |
| Profit margin | percentage of sales left after all firm expenses are deducted- high means that firm has low expenses relative to sales |
| basic earnings power | Measures the operating return on the firm’s assets, regardless of financial leverage and taxes. – measures the operating profit (EBIT) earned per dollar of assets on the firm’s balance sheet. |
| return on assets | Measures the overall return on the firm’s assets, including financial leverage and taxes.- net income earned per dollar of assets on the firm’s balance sheet. |
| Return on equity | Measures the return on the common stockholders’ investment in the assets of the firm. – It is the net income earned per dollar of common stockholders’ equity. |
| Value of a firm’s ROE is affected by | net income, but also amount of financial leverage or debt that a firm uses- high ROE is a positive sign |
| Dividend payout | % of net income available to common stockholders that the firms actually pays as cash to these investors- aka how much of the profit the firm retains versus how much it pays out- low |
