Explore BrainMass

Explore BrainMass

    Short term solvency ratios

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    HANDOUT: Useful Financial Ratios (see attachment)

    SHORT-TERM SOLVENCY RATIOS (Liquidity Ratios)
    Current ratio = Current assets ÷ Current liabilities
    Quick ratio = (Current assets - Inventory) ÷ Current liabilities
    ACTIVITY RATIOS
    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
    FINANCIAL LEVERAGE RATIOS
    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
    PROFITABILITY RATIOS
    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
    MARKET VALUE RATIOS
    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

    DUPONT RATIO

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

    © BrainMass Inc. brainmass.com June 4, 2020, 4:59 am ad1c9bdddf
    https://brainmass.com/business/current-ratio/short-term-solvency-ratios-591971

    Attachments

    Solution Preview

    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.

    $2.19

    ADVERTISEMENT