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Short term solvency ratios

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HANDOUT: Useful Financial Ratios (see attachment)

Current ratio = Current assets ÷ Current liabilities
Quick ratio = (Current assets - Inventory) ÷ Current liabilities
Total asset turnover = Total operating revenues ÷ Average total assets
Receivables turnover = Total operating revenues ÷ Average receivables
Average collection period = Days in period ÷ Receivables turnover
Inventory turnover = Cost of goods sold ÷ Average inventory
Days in inventory = Days in period ÷ Inventory turnover
Debt ratio = Total debt ÷ Total assets
Debt-equity ratio = Total debt ÷ Total equity
Equity multiplier = Total assets ÷ Total equity
Interest coverage = Earnings before interest and taxes ÷ Interest
Net profit margin = Net income ÷ Total operating revenue
Operating profit margin = Earnings before interest and taxes ÷ Total operating revenues
Net return on assets = Net Income ÷ Average Total Assets
Gross return on assets = Earnings before interest and taxes ÷ Average total assets
Net[Gross] Return on assets (ROA) = Net[Gross] Profit margin × Asset Turnover
Return on equity (ROE) = Net income ÷ Average stockholders' equity
Payout ratio = Cash dividends ÷ Net Income
Retention ratio = Retained earnings ÷ Net Income = 1 - Payout ratio
Price-to-earnings (P/E) ratio = Market price per share ÷ Earnings per share
Dividend yield = Dividend per share ÷ Market price per share
Market-to-book (M/V) ratio = Market price per share ÷ Book value per share
Tobin's Q ratio = (Market value of debt + equity) ÷ Replacement value of total assets


Net profit ratio x Total asset turnover x 1+ Debt ratio

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SHORT-TERM SOLVENCY RATIOS (Liquidity Ratios) - See attachment.

1) Current ratio
Current ratio is computed as current assets divided by current liabilities. Current assets include cash and cash equivalents, accounts receivable, marketable securities, inventory, supplies and prepaid items. Current liabilities include accounts payable, salaries payable and other short term obligations that are to be paid within a years' time. A current ratio of 2 and above is considered a benchmark for a sound liquidity position. If the current ratio is less than 2, ...

Solution Summary

This solution provides an explanation of current and quick ratios.

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UABC: Common sizing, solvency, performance ratios

A. Prepare a comprehensive analysis of UABC for 2011, including the following measures (round all calculations to three decimal places.
1. Short-term solvency ratios (current ratio, acid test, inventory turnover, and days sales in receivables ratios)
2. Long-term solvency ratios (debt-to-equity and times-interest-earned ratios)
3. Performance measurement ratios (asset turnover, return on sales, return on assets, and return on equity ratios)

B. Comment on the financial condition of UABC with respect to short-term solvency, long-term solvency, and performance.

C. Using the data for UABC Company, prepare common size (vertical analysis) statements and evaluate the company's performance in 2011 as compared to 2010. For the balance sheets, use total assets as the base; for the income statements, make one set using sales of each year as the base (vertical analysis) and another set using the year 2010 as the base for both years (horizontal analysis).

D. Comment on the condition of UABC drawing on the common size statements prepared above.

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