Liquidity Ratio
Liquidity Ratio
Liquidity Ratio
Liquidity ratio, expresses a company's ability to repay short-term creditors out of its total cash. The liquidity ratio is the result of dividing the total cash by short-term borrowings. It shows the number of times short-term liabilities are covered by cash. If the value is greater than 1.00, it means fully covered. The formula is the following: = cash & equivalents / creditors,short
Reserve requirement, a bank regulation that sets the minimum reserves each bank must hold. Acid Test (Liquidity Ratio), a ratio used to determine the liquidity of a business entity.
Liquidity ratio, expresses a company's ability to repay short-term creditors out of its total cash. The liquidity ratio is the result of dividing the total cash by short-term borrowings. It shows the number of times short-term liabilities are covered by cash. If the value is greater than 1.00, it means fully covered. The formula is the following: LR = liquid assets / short-term liabilities.
Liquidity Ratios:
Liquidity Ratios are ratios that come off the the Balance Sheet and hence measure the liquidity of the company as on a particular day i.e the day that the Balance Sheet was prepared. These ratios are important in measuring the ability of a company to meet both its short term and long term obligations.
The formula:
Current Ratio = Total Current Assets/ Total Current Liabilities
The Interpretation:
Lumber & Building Supply Company has $1.48 of Current Assets to meet $1.00 of its Current Liability
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The formula:
Quick Ratio = Total Quick Assets/ Total Current Liabilities Quick Assets = Total Current Assets (minus) Inventory
The Interpretation:
Lumber & Building Supply Company has $0.59 cents of Quick Assets to meet $1.00 of its Current Liability Review the Industry Norms in the same industry.
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The formula:
Debt to Equity Ratio = Total Liabilities / Owners Equity or Net Worth
$ 261,050
$ 176,522
Mortgage (Loans)
$ 10,000
Total Liabilities
$ 186,522
Networth
$ 133,522
Total Assets
$ 320,044
$ 320,044
The Interpretation:
Lumber & Building Supply Company has $1.40 cents of Debt and only $1.00 in Equity to meet this obligation. Review the Industry Norms in the same industry.
Efficiency Ratios:
Efficiency ratios are ratios that come off the the Balance Sheet and the Income Statement and therefore incorporate one dynamic statement, the income statement and one static statement , the balance sheet. These ratios are important in measuring the efficiency of a company in either turning their inventory, sales, assets, accounts receivables or payables. It also ties into the ability of a company to meet both its short term and long term obligations. This is because if they do not get paid on time how will you get paid paid on time. You may have perhaps heard the excuse 'I will pay you when I get paid' or 'My customers have not paid me!'
Formula:
Current Receivables Total credit sales for the period analyzed The Number of days in the period analyzed
The formula:
Regular DSO = (Total Accounts Receivables/Total Credit Sales) x Number of Days in the period that is being analyzed
Number of days in the period = 1 year = 360 days ( some take this number as 365 days) DSO = [ $97,456 / $727,116 ] x 360 = 48.25 days
The Interpretation:
Lumber & Building Supply Company takes approximately 48 days to convert its accounts receivables into cash. Compare this to their Terms of Net 30 days. This means at an average their customers take 18 days beyond terms to pay. Review the Industry Norms in the same industry.
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by dividing the 'Total Sales' of a company by its 'Total Inventory'. The ratio is regarded as a test of Efficiency and indicates the rapiditity with which the company is able to move its merchandise.
The formula:
Inventory Turnover Ratio = Net Sales / Inventory
It could also be calculated as: Inventory Turnover Ratio = Cost of Goods Sold / Inventory An example from our Balance sheet and Income Statement:
Net Sales = $727,116 (from
The Interpretation:
Lumber & Building Supply Company is able to rotate its inventory in sales 4.6 times in one fiscal year. Review the Industry Norms and Ratios for this ratio to compare their efficiency and see if they are above, below or equal to the others in the same industry. To use the Inventory Turnover Ratio Calculator Click here
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The formula:
Accounts Payables to Sales Ratio = [Accounts Payables / Net Sales ] x 100
Balance sheet )
Income Statement)
Accounts Payables to Sales Ratio = [$152,240 / $727,116] x 100 Accounts Payables to Sales Ratio = 20.9%
The Interpretation:
21% of Lumber & Building Supply Company's Sales is being funded by its suppliers.
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Profitability Ratios:
Profitability Ratios show how successul a company is in terms of generating returns or profits on the Investment that it has made in the business. If a business is Liquid and Efficient it should also be Profitable.
The formula:
Return on Sales or Profit Margin = (Net Profit / Net Sales) x 100
Return on Sales or Profit Margin = [ $5,142 / $727,116] x 100 Return on Sales or Profit Margin = 0.71%
The Interpretation:
Lumber & Building Supply Company makes 0.71 cents on every $1.00 of Sale
Industry Norms and Ratios for this ratio to compare and see if they are above below or equal to the click here
.
The formula:
Return on Assets = (Net Profit / Total Assets) x 100
The Interpretation:
Lumber & Building Supply Company generates makes 1.60% return on the Assets that it employs in its operations.
Industry Norms and Ratios for this ratio to compare and see if they are above below or equal to the click here
.
The formula:
Return on Equity or Net Worth = (Net Profit / Net Worth or Owners Equity) x 100 Net Worth or Owners Equity = Total Assets (minus) Total Liability
Return on Net Worth = [ $5,142 / $133,522] x 100 Return on Equity or Return on Net Worth = 3.85%
The Interpretation:
Lumber & Building Supply Company generates a 3.85% percent return on the capital invested by the owners of the company.
Industry Norms and Ratios for this ratio to compare and see if they are above below or equal to the click here