Ratios |
Formula |
Description |
Current Ratio |
Current Assets / Current Liabilities |
This ratio reflects the number of times short-term assets cover short-term liabilities and is a fairly accurate indication of a company's ability to service its current obligations. A higher number (atleast 1.25:1) is preferred because it indicates a strong ability to service short-term obligations. |
Quick Ratio |
(Current Assets-inventories-prepaid expenses)/Current Liabilities |
This ratio, also known as the acid test ratio, measures immediate liquidity - the number of times cash, accounts receivable, and marketable securities cover short-term obligations. A higher number (ideal 1:1) is preferred because it suggests a company has a strong ability to service short-term obligations. This ratio is a more reliable variation of the Current ratio because inventory, prepaid expenses, and other less liquid current assets are removed from the calculation. |
Defensive Interval Days |
QUICK ASSETS/AVERAGE DAILY CASH OPERATING EXPENSES i.e. (Current Assets-inventories-prepaid expenses) / (Operating Expenses - Other Expenses - Interest Expense - Provision for Income Taxes - Amortization Expense) / Days) |
This ratio gauges the threat of insolvency for investors by calculating the number of days a company can operate without any cash returns while meeting its basic operational costs. |
Accounts Receivable to Working Capital |
Trade Accounts Receivable / (Current Assets - Current Liabilities) |
This ratio measures the dependency of working capital on the collection of receivables. A lower number for this ratio is preferred, indicating that a company has a satisfactory level of working capital and accounts receivable makes up an appropriate portion of current assets. |
Inventory to Working Capital |
Inventory / (Current Assets - Current Liabilities) |
This ratio measures the dependency of working capital on inventory. A lower number for this ratio is preferred indicating that a company has a satisfactory level of working capital and inventory makes up a reasonable portion of current assets. |
Sales to Working Capital |
Sales / (Current Assets - Current Liabilities) |
This ratio measures a company's ability to finance current operations. Working capital (current assets-current liabilities) is another measure of liquidity and the ability to cover short-term obligations. This ratio relates the ability of a company to generate sales using its working capital to determine how efficiently working capital is being used. In general, a lower number is preferred because it indicates a company has a satisfactory level of working capital. However, an exceptionally low number may indicate inadequate sales levels are being generated. |
Activity Analysis |
Sales / (Current Assets - Current Liabilities) |
This ratio measures a company's ability to finance current operations. Working capital (current assets-current liabilities) is another measure of liquidity and the ability to cover short-term obligations. This ratio relates the ability of a company to generate sales using its working capital to determine how efficiently working capital is being used. In general, a lower number is preferred because it indicates a company has a satisfactory level of working capital. However, an exceptionally low number may indicate inadequate sales levels are being generated. |
Days Sales in Receivables |
Trade Accounts Receivable / (Sales / Days) |
This ratio measures the average number of days a company's receivables are outstanding. A lower number of days is desired. An increase in the number of days receivables are outstanding indicates an increased possibility of late payment by customers. Companies should attempt to reduce the number of days sales in receivables in order to increase cash flow. |
Inventory Turnover |
COST OF GOODS SOLD /AVERAGE INVENTORY |
This ratio measures the velocity of conversion of stock into sales. A higher number is preferred because it indicates efficient management of inventory. |
Operating Cycle Days |
(Inventory / (Cost of Sales / Days)) + (Trade Accounts Receivable / (Sales / Days)) |
This ratio calculates the total conversion period for a company, or in other words, the average number of days it takes to convert inventory into cash from sales. It is calculated by adding together the days cost of sales in inventory to the days sales in receivables. Evaluating this ratio can be helpful in gauging the effectiveness of marketing, determining credit terms to extend to customers, and collecting outstanding accounts. |
Sales to Assets |
Sales / Total Assets |
This ratio measures a company's ability to produce sales in relation to total assets to determine the effectiveness of the company's asset base in producing sales. A higher number is preferred, indicating that a company is using its assets to successfully generate sales. This ratio does not take into account the depreciation methods employed by each company and should not be the only measure of effectiveness of a company in this area. |
Percent Accumulated Depreciation to Fixed Assets |
Accumulated Depreciation / Property and Equipment * 100 |
This ratio measures the cumulative percentage of productive asset costs a company has allocated to operations. |
Net Fixed Assets to Equity |
(Property and Equipment - Accumulated Depreciation) / Total Equity |
This ratio measures the extent to which investors' capital was used to finance productive assets. A lower ratio indicates a proportionally smaller investment in fixed assets in relation to net worth, which is desired by creditors in case of liquidation. |