Table of Contents

1.0 Introduction ......................................................................................................................... 2

2.0 Top Glove group’s profile .................................................................................................... 2
3.0 Financial Analysis ................................................................................................................. 3
3.1 Profitability Ratio ............................................................................................................. 3
3.2 Efficiency ratio ................................................................................................................. 3
3.3 Liquidity Ratio .................................................................................................................. 4
3.4 Capital Structure Ratio .................................................................................................... 5
3.5 Market Performance ....................................................................................................... 5
4.0 Ratio Analysis....................................................................................................................... 6
Profitability Ratio ................................................................................................................... 6
1a) Return on Shareholders Fund Ratio (ROCE)/ Return on Equity Ratio (ROE) ............... 6
1b) Return on Equity (ROE) ............................................................................................... 6
1c) Net Profit Margin ......................................................................................................... 6
1d) Gross Profit Margin ..................................................................................................... 7
Efficiency Ratio ...................................................................................................................... 7
2a) Account Receivables Turnover Ratio ........................................................................... 7
2b) Inventory Turnover Ratio ............................................................................................ 8
2c) Account Payable Turnover........................................................................................... 8
2d) Total asset turnover ratio............................................................................................ 9
Liquidity Ratio ...................................................................................................................... 10
3a) Current Ratio ............................................................................................................. 10
3b) Acid Test ratio ........................................................................................................... 10
Capital Structure Ratio ........................................................................................................ 11
4a) Debt to Equity Ratio .................................................................................................. 11
4b) Debt Ratio.................................................................................................................. 11
4c) Equity Ratio................................................................................................................ 11
Gearing Ratio ....................................................................................................................... 12
5a) Earning Per Share ...................................................................................................... 12
5.0 Conclusion ......................................................................................................................... 13
6.0 REFERENCES ...................................................................................................................... 15
11.0 Appendices ...................................................................................................................... 16
Definitions and formula of ratios ........................................................................................ 16

Page 1 of 22
1.0 Introduction
Financial statement analysis in account is to review the financial situation of a business or a
company. Investors and shareholders can review the company’s financial structure and
situation before making decision and investment. For this assignment, the company that I
chose is Top Glove Sdn Bhd., which is a company has listed in Bursa Malaysia. In this
assignment, I am going to figure out and analysis the financial situation of Top Glove
Company. There are some accounting ratio categories like probability, asset efficiency
liquidity, and capital structure and market performance. These ratios can be used to analyse
the efficiency and probability of Top Glove Sdn.Bhd

2.0 Top Glove group’s profile

Top Glove SD Bhd is a company which is manufacturing rubber glove. The headquarter of
Top Glove is located in Setia Alam, Malaysia. Then1991 company had founded it has
manufactured the rubber gloves over 20 years. Nowadays, Top Glove operates about 40
manufacturing facilities in difference countries and it also sets up the marketing offices in
Malaysia, United States and Germany. Top glove produces variety of rubber gloves, such as
surgical glove, vinyl glove, nitrile glove, non-medical glove and the other dental care
products. From the business venture at the beginning, Top Glove’s production line was only
1 and now it has increased to 684 lines as at September 2018. The number of employees
from 100 also has increased to 17,000. Besides, rubber glove of Top Glove exports to over
195 countries and number of customers are over 2,000. In May of 2018, Top Glove’s annual
turnover has reached about RM2.9 billion and shareholder fun was RM 2.3 million. As they
look for the future, Top Glove aspires to become top 20 company in Bursa by 2020.
Furthermore, Top Glove also has a target which captures at least 30% of the world market in
the realm of manufacturing rubber glove. Top Glove also looks forward to the Fortune
Global 500 Company in the world.

Page 2 of 22
3.0 Financial Analysis
3.1 Profitability Ratio
Top Glove Top Glove
Ratio Formula 2017 2016
1a) Return on Profit Available 328,436,000 362,439,000
× 100% × 100%
2,012,481 1,825,839
equity(ROE) to owners/
= RM1.60 = 0.20%
Average
owners’ equity
1b) Return on Net Operating 383,105,000+6,314,000 442,202,000+5,611,000
× ×
634,644,000+61,750,000 627,406,000+81,637,000
Assets (ROCE) Profit/ Share
100% 100%
Capital + Long
= 55.92% = 63.16%
term Loans
1c) Net Profit Net Profit/ Net 383,105,000+6,314,000 442,202,000+5,611,000
3,409,176,000
× 2,888,515,000
×
Margin Sales
100% 100%
= 14.42% = 15.51%
1d) Gross Profit Total Sales/ 605,319,000 595,546,000
Margin Cost of Goods 3,409,176,000 2,888,515,000
= 0.18% = 0.21%
sold

3.2 Efficiency ratio

Top Glove Top Glove
Ratio Formula 2017 2016
2a) Net Credit 2,803,857,000 2,292,969,000
(419,349,000+345,700,000)/2 (345,700,000+252,115,000)/2
Account Sales/
= 7.33 times = 7.67 times
Receivables Average
Turnover Account
Receivables
2b) Cost of 2,803,857,000 292,969,000
3,409,176,000+2,888,515,000 1,955,610,000+288,515,000
Inventory good sales/
= 0.44 times = 0.47 times
Turnover Average
Ratio Inventory

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2c) Total 54,899,8578 13,856,969
(418,802,000+332,199,000) (332,199,000+326,174,000
Account purchase/
= 0.07 = 0.02
Payable Average
turn over account
payable
2d) Total Sales/ 3,409,176,000 2,888,515,000
(2,936,253,000 + 2,649,142,000)/2 (2,649,142,000 + 2,687,930,000)/2
Asset Average
= RM1.22 per share = 1.08 per share
Turnover total assets
Ratio
2e) Fixed Net Sales/ 328,436,000 362,439,000
1,684,897,000 + 1,312,404,000 1,312,404,000 + 1,214,835,000
Asset Average
= 0.11 = 0.14
Turnover Fixed
Ratio Assets

3.3 Liquidity Ratio

Top Glove Top Glove
Ratio Formula 2017 2016
3a) Current Ratio Current 1,251,356,000 1,336,738,000
795,738,000 690,909,000
Assets/
= 1.51 times = 1.93 times
Current
Liabilities
3b) Quick Asset Current Assets 1,251,356,000−315,775,000 1,336,738,000−263,679,000
795,738,000
690,909,000
Ratio – Inventory /
= 1.18 times
= 1.56 times
Current
Liabilities

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3.4 Capital Structure Ratio
Top Glove Top Glove
Ratio Formula 2017 2016
4a) Debt to Equity Total liabilities/ 923,772,000 823,303,000
× 100% × 100%
2,012,481,000 1,825,839,000
Ratio Total equity
= 46% = 46%
4b) Debt Ratio Cost of good 3923,772,000 823,303,000
× 100% × 100%
2,936,253,000 2,649,142,000
sales/ Average
= 31% = 31%
Inventory
4c) Equity Ratio Total purchase/ 2,012,481,000 1,825,839,000
× 100% × 100%
2,936,253,000 2,649,142,000
Average
= 69% = 69%
account
payable

3.5 Market Performance

Top Glove
Ratio Formula 2017 2016
5a) Earning per Net Profit 328,436,000 362,439,000
634,644,000 627,406,000
share after Tax/
= 0.52 = 0.58
Number of
Equity Share

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4.0 Ratio Analysis

Profitability Ratio
1a) Return on Shareholders Fund Ratio (ROCE)/ Return on Equity Ratio (ROE)
Top Glove
2017 2016
0.16% 0.20%

For Top Glove, the Return on Shareholders Fund Ratio in year 2016 to 2017 has decreased
0.4%. This shows that the company is less profitable and profit share less than last year to
the stakeholders. Besides, Return on Shareholders Fund Ratio can reflect how a company
manages their equity financial to grow their business. The decreasing ratio that shown in
2017 reflected Top Glove might didn’t have reinvest the company’s earning well.
Furthermore, Top Glove management pool in reinvest decision as the declining ratio.

1b) Return on Equity (ROE)

Top Glove
2017 2016
55.92% 63.16%

The ROE ratio of Top Glove has decreased 7.24% which is less than last year. This indicates
that the Top Glove Company has to try reducing company’s cost and restructuring their
financing. Although the company had borrow about 61 million of long-term loans in year
2017. Meanwhile this will increase the risk of the company unable to cover the risk. If
according to this result, this long-term loans will help Top Glove to keep their company
financing in healthy condition in next few years. Thus, the company can generate more
profit from the available capital.

1c) Net Profit Margin

Top Glove
2017 2016

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 14.42% 15.51%

The net profit margin in year 2016 is 14.42%, and 15.51% in year 2017. The ratio has
decreased slightly compare with the previous year, which decreased 1.09%. Top Glove‘s
revenue in year 2017 is RM 3 million, which is more the 2016, but it has to spend more taxes
in 2017. This negative of Net Profit Margin indicates the inefficiency management of the
company. Furthermore, the Top Glove Company had to spend more administrative and
general expenses to manage the company. Besides, having negative Net Profit Margin also
will impact the liability of company, because the company is paying taxes on the net profit.

1d) Gross Profit Margin

Top Glove
2017 2016
0.18% 0.21%

From the ratioo above, we can see that the gross profit margin in year 2016 to 2017 has
decreased than previous year. This also shows that the financial condition of the company in
year 2016 was decreased. The costs of materials like rubber increases will direct affecting
the ratio of gross profit margin of the company. Besides, distribution and selling costs,
administrative and general expenses in year 2017 had increased significantly. All of these
costs and expenses show positive will bring negative to the Gross Profit Margin. So, Top
Glove has to find out the method like expand the sales, or raise up their product price in
order to increase the Gross Profit Margin.

Efficiency Ratio
2a) Account Receivables Turnover Ratio
Top Glove
2017 2016
7.33 times 7.67 times

Page 7 of 22
For Top Glove Company, the Account Receivables Turnover Ratio had shown 7.67% in 2016
and 7.33% times in year 2017. This indicates that year 2017 has decreased 0.34 times
compare with last year, which is year 2016. This negative Account Receivables Turnover
Ratio implies Top Glove may have a problem which has to improve their efficiency in the
process of collecting debts from the customers. If customers are not paying off their debts in
time. Account Receivables Turnover Ratio of company will be influenced. For preventing
thee bad debts, Top Glove has to set up a process and filter out the customers who may take
long time to pay off their debts. So, Top Glove has to improve this part in order to ensure
they are efficient in collection of around receivables.

2b) Inventory Turnover Ratio

Top Glove
2017 2016
2.25 times 2.11 times

The Inventory Turnover Ratio of Top Glove in 2016 is 2.11 times and 2.25 times in year 2017.
Refers to the result above, the ratio in year 2017 has decreased 0.14 times, which is more
than last year 2016. The result indicates Top Glove has become more efficiency in the part of
managing their company inventories. Good operation in managing inventory stocks will help
the company to cut down the cost of holding stocks. Conversely, if a company’s inventory
turnover ratio increases, this will lead to increase inventory holding cost.

2c) Account Payable Turnover

Top Glove
2017 2016
0.07 0.02

In 2016, Top Glove’s Account Payable Turnover ratio is 0.021 and the ratio in year 2017 is
0.073. The ratio as resulted in above shown that Account Payable Turnover ratio has
decreased 0.052 in year 2017 compared with year 2016. This represents that Top Glove has
paid the debts regularly and quickly. The company with higher ratio in Account Payable

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Turnover means it using short term period to settle the debts. Meanwhile, the company may
get a discount price from the vendor or company. Besides, the Account Payable Turnover
ratio also will helps the company manage and access their financial well.

2d) Total asset turnover ratio.

Top Glove
2017 2016
RM 1.22 per share RM 1.08 per share

In year 2016, Top Glove had generated 1.08% profit in sales, while year 2017 generated
1.22%. This implies that Top Glove may experiences holding obsolete inventories in year
2016. This Total asset turnover ratio can show the company’s ability in producing sales. In
year 2017, the efficiency of Top Glove has increased 0.14% compared to previous year. This
also mean that Top Glove operated the fewer assets and just need less equity and debt to
run their company.

2e) Fixed Asset Turnover Ratio

Top Glove
2017 2016
0.11 0.14
In year 2016, the fixed asset turnover of Top Glove was 0.14 and 0.11 in 2017. The ratio had
decreased 0.03 between year 2016 and 2017. The declining ratio indicates that Top Glove
might have lower efficiency in managing its fixed asset, this lower ratio will also leads to
lower return on assets investment. In the term of Fixed Asset Turnover Ratio, shareholders
can measure the return money that they invested and how well the company is running.

Page 9 of 22
Liquidity Ratio
3a) Current Ratio
Top Glove
2017 2016
1.51% 1.93%

For Top Glove, the current ratio in year 2016 is 1.93% and 1.51% in year 2017. The current
ratio has decreased 0.42% in year 2017. According to the statement of financial position
year 2017, Top Glove‘s current assets and current liabilities are less that previous year,
which is 2016. The decrease of current ratio means that the ability of the company in pay off
the short-term debts by using current assets is weak. If the company poor in collection of
account receivable, the current assets of company also will be influenced. Besides, this lower
current ratio may might leads to Top Glove Company suffer into the debts.

3b) Acid Test ratio

Top Glove
2017 2016
1.1 8: 1 1.56 : 1

The Acid Test ratio in 2016 is 1.55 and 1.18 in year 2017. Company with Acid-test Ratio of 1:1
or exceed 1 indicates that is has enough of liquid assets to pay off their company’s current
liabilities. So, although the result shown that the Acid-test Ratio has decreased 0.37 in year
2017, but the company still has enough of current assets to cover the debts. If the current
ratio is higher than the Acid-test Ratio, it means that current assets are rely on the company
inventory.

Page 10 of 22
Capital Structure Ratio
4a) Debt to Equity Ratio
Top Glove
2017 2016
0.46 0.46

The Debt to Equity Ratio in year 2016 is 0.45 and year 2017 is 0.46. The result shown that
year 2017 has increased 0.1 compared to the previous year. The Debt to Equity Ratio of Top
Glove in year 2017 is 0.45:1, which means the liabilities of company are 45% of stakeholder’s
equity. The idea number of debt to equity of a company is lower than 1, because the lower
ratio implies the company has great protection to their money.

4b) Debt Ratio

Top Glove
2017 2016
31% 31%

The formula of Debt Ratio is total liabilities of company divided to its total assets. For top
Glove, debt ratio in year 2016 and year 2017 are 31%. This debt ratio result determined that
Top Glove is good in managing company assets. Besides, the less leverage of Top Glove
represents company using most of the assets than the equity. So, the debt ratio is very
important for investors due to they can know the company’s risk levels through the result.
Conversely, if a company debt ratio is greater than 100%, this means that the company may
faces risk in financial.

4c) Equity Ratio

Top Glove
2017 2016
69% 69%

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The Equity Ratio of Top Glove in year

2016 and 2017 are 69%. This indicates Top Glove’s financial structure is in healthy condition.
Besides, the 69% Equity Ratio also implies Top Glove financial a greater portion of company
equity and asset. For this situation, the lower position of debt will be used for the company
to pay off the debts. Creditors and stakeholders likely to see a high equity ratio because it
means that the company can pay off the debts on time.

Gearing Ratio
5a) Earning Per Share
Top Glove
2017 2016
RM0.52 RM0.58

As we can see, Top Glove’s earning per Share for 2016 is RM0.58 and RM0.52 in2017. It has
decreased RM0.06 in2017 compared to 2016. For 2017, it means each share of Top Glove
will distribute RM0.52 to the investors. For investors and shareholders, it is important for
them to measure a company’s profitability by calculation of Earnings per Share. In general,
higher ratio of Earning per Share is better than the lower ratio. Higher ration means that the
company can distribute more profits to the investors and shareholders.

Page 12 of 22
5.0 Conclusion
Based on the result above, we can found that Top Glove’s performance has been declining
slightly in year 2017 if compared to year 2016. From the income statement of Top Glove, net
profit of tax in 2017 is about RM383 million and RM362 in 2016.

According to the probability ratios, we can observe that the return on equity has declined
between year 2016 and year 2017. I year 2017, Top Glove had put about RM2 billion of
equity, and finally they earned about RM1.60 for every Ringgit of common shareholder’s
equity. Top Glove should retain these profit and try to increase their performance in this
part. From the ROCE ratio, we can see that the return of profit has decreased 0.05 between
year 2016 and year 2017, this indicates that every Ringgit invested in capital employed Top
Glove gains less0.05 profit that the last year. Top Glove had large amount of assets but they
just can gain a return that lower than the last year, this is worrying.

In the terms of liquidity ratios, we can found that current ratio of Top Glove in year 2017
also lower than previous year. This lower current ratio implies that inventory management
of Top Glove occurs some problems. They might face some problems in the process of
collecting receivable. If decreasing of current ratio still continuing, the company may stop
growing and even comes out with a negative current ratio. Furthermore, we can also
observe that Top Glove’s Acid-test Ratio has decreased 0.37 compared to the year 2016. The
idea Acid-test Ratio of a company is exceeding 1. As the number shown in the Acid-test Ratio
of Top Glove, the company still has a good performance in this part, the number that over 1
represents that Top Glove has capability to convert its assets in to cash within 90 days in
order to pay their debts in the short-term period of time.

From the Capital Structure Ratio of Top Glove, we can see that most of ratios are retain,
which are same with the previous year. This means that Top Glove short-term debt, long-
term debt and equity has been managing well and the risk in debts also is lower.

From the calculation of variety accounting ratios above, we can found that Top Glove
performance was declining in year 2017. The profit as shown in the financial report is lower
than the last year. These negative ratio implies that Top Glove may face a lot of loses in its
business. The negative performance in revenue and shares indicates that management of
the company is not stable and not effective. If Top Glove continues to maintain this status
quo, shareholders and investors may lost confidence of its company management. So, Top
Glove management has to think about a specific plan for the company in order to avoid the
negative situation. Top Glove need to emphasis on their financial and try to reduce taxes for

Page 13 of 22
the company. Then, Top Glove also should set up a system to collects the receivable in the
short-term time, this will preventing the bad debts occurs. For short-term loan that
borrowed by the company, they should also manages it carefully, because short-term loans
are very important to company for making profits. If Top Glove management is able to
manage the financial welly, I believe that the profit of the company sure will increase in the
next few years.

Page 14 of 22
6.0 REFERENCES
Top Glove Corporation Bhd (2018). Top Glove. Retrieved 9 September 2018 from
http://www.topglove.com/

CFI Education Inc. (2018). What is Return on Equity (ROE)? Retrieved 9 September 2018 from
https://financelearners.blogspot.com/2011/06/return-on-shareholders-funds-rosf-
ratio.html.

MyAccountingCourse.com. (2018). Return on Capital Employed. Retrieved 9 September 2018

from https://www.myaccountingcourse.com/financial-ratios/return-on-capital-employed

MyAccountingCourse.com. (2018).Gross Profit Margin. Retrieved 9 September 2018 from

https://www.myaccountingcourse.com/financial-ratios/gross-profit-margin

MyAccountingCourse.com. (2018).Profit Margin Ratio. Retrieved 9 September 2018 from

https://www.myaccountingcourse.com/financial-ratios/profit-margin-ratio

MyAccountingCourse.com. (2018). Accounts Receivable Turnover Ratio. Retrieved 9

September 2018 from https://www.myaccountingcourse.com/financial-ratios/accounts-
receivable-turnover-ratio

MyAccountingCourse.com. (2018). Inventory Turnover Ratio. Retrieved 9 September 2018

from https://www.myaccountingcourse.com/financial-ratios/inventory-turnover-ratio

MyAccountingCourse.com. (2018). Accounts Payable Turnover Ratio. Retrieved 9 September

2018 from https://www.myaccountingcourse.com/financial-ratios/accounts-payable-
turnover-ratio

MyAccountingCourse.com. (2018). What is the Total Asset Turnover Ratio? Retrieved 9

September 2018 from

MyAccountingCourse.com. (2018). What is Fixed Asset Turnover? Retrieved 9 September

2018 from https://www.myaccountingcourse.com/financial-ratios/fixed-asset-turnover

MyAccountingCourse.com. (2018). Current Ratio. Retrieved 9 September 2018 from

https://www.myaccountingcourse.com/financial-ratios/current-ratio

MyAccountingCourse.com. (2018). Quick Ratio. Retrieved 9 September 2018 from

https://www.myaccountingcourse.com/financial-ratios/quick-ratio

MyAccountingCourse.com. (2018). Debt to Equity Ratio. Retrieved 9 September 2018 from

https://www.myaccountingcourse.com/financial-ratios/debt-to-equity-ratio

MyAccountingCourse.com. (2018). Debt Ratio. Retrieved 9 September 2018 from

https://www.myaccountingcourse.com/financial-ratios/debt-ratio

MyAccountingCourse.com. (2018). Debt to Equity Ratio. Retrieved 9 September 2018 from

https://www.myaccountingcourse.com/financial-ratios/debt-to-equity-ratio

MyAccountingCourse.com. (2018). Cash Earnings per Share (Cash EPS). Retrieved 9

September 2018 from https://www.myaccountingcourse.com/financial-ratios/cash-eps

Page 15 of 22
11.0 Appendices
Definitions and formula of ratios

Return on Equity (ROE)

Return on Equity (ROE) is a measure of a company’s annual return (net income) divided by
the value of its total shareholders’ equity, expressed as a percentage (i.e. 12%). Alternatively,
ROE can also be derived by dividing the firm’s dividend growth rate by its earnings retention
rate (1 – dividend payout ratio).

Return on Equity is a two-part ratio in its derivation because it brings together the income
statement and the balance sheet, where net income or profit is compared to the
shareholders’ equity. The number represents the total return on equity capital and shows
the firm’s ability to turn assets into profits. To put it another way, it measures the profits
made for each dollar from shareholders’ equity. (CFI Education Inc, 2018)

Return on Capital Employed

Return on capital employed or ROCE is a profitability ratio that measures how efficiently a
company can generate profits from its capital employed by comparing net operating profit
to capital employed. In other words, return on capital employed shows investors how many
dollars in profits each dollar of capital employed generates.

ROCE is a long-term profitability ratio because it shows how effectively assets are
performing while taking into consideration long-term financing. This is why ROCE is a more
useful ratio than return on equity to evaluate the longevity of a company.

This ratio is based on two important calculations: operating profit and capital employed. Net
operating profit is often called EBIT or earnings before interest and taxes. EBIT is often
reported on the income statement because it shows the company profits generated from
operations. EBIT can be calculated by adding interest and taxes back into net income if need
be.

Capital employed is a fairly convoluted term because it can be used to refer to many
different financial ratios. Most often capital employed refers to the total assets of a
company less all current liabilities. This could also be looked at as stockholders’ equity less
long-term liabilities. Both equal the same figure.

Page 16 of 22
Gross profit margin

Gross profit margin is a profitability ratio that calculates the percentage of sales that exceed
the cost of goods sold. In other words, it measures how efficiently a company uses its
materials and labor to produce and sell products profitably. You can think of it as the
amount of money from product sales left over after all of the direct costs associated with
manufacturing the product have been paid. These direct costs are typically called cost of
goods sold or COGS and usually consist of raw materials and direct labor.

The gross profit ratio is important because it shows management and investors how
profitable the core business activities are without taking into consideration the indirect costs.
In other words, it shows how efficiently a company can produce and sell its products. This
gives investors a key insight into how healthy the company actually is. For instance, a
company with a seemingly healthy net income on the bottom line could actually be dying.
The gross profit percentage could be negative, and the net income could be coming from
other one-time operations. The company could be losing money on every product they
produce, but staying a float because of a one-time insurance payout.
(MyAccountingCourse.com, 2018)

Profit Margin Ratio

The profit margin ratio, also called the return on sales ratio or gross profit ratio, is a
profitability ratio that measures the amount of net income earned with each dollar of sales
generated by comparing the net income and net sales of a company. In other words, the
profit margin ratio shows what percentage of sales are left over after all expenses are paid
by the business.

Creditors and investors use this ratio to measure how effectively a company can convert
sales into net income. Investors want to make sure profits are high enough to distribute
dividends while creditors want to make sure the company has enough profits to pay back its
loans. In other words, outside users want to know that the company is running efficiently.
An extremely low profit margin formula would indicate the expenses are too high and the
management needs to budget and cut expenses. (MyAccountingCourse.com, 2018)

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Accounts Receivable Turnover Ratio

Accounts receivable turnover is an efficiency ratio or activity ratio that measures how many
times a business can turn its accounts receivable into cash during a period. In other words,
the accounts receivable turnover ratio measures how many times a business can collect its
average accounts receivable during the year.

A turn refers to each time a company collects its average receivables. If a company had
$20,000 of average receivables during the year and collected $40,000 of receivables during
the year, the company would have turned its accounts receivable twice because it collected
twice the amount of average receivables.

This ratio shows how efficient a company is at collecting its credit sales from customers.
Some companies collect their receivables from customers in 90 days while other take up to 6
months to collect from customers.

In some ways the receivables turnover ratio can be viewed as a liquidity ratio as well.
Companies are more liquid the faster they can covert their receivables into cash.
(MyAccountingCourse.com, 2018)

Inventory Turnover Ratio

The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is
managed by comparing cost of goods sold with average inventory for a period. This
measures how many times average inventory is “turned” or sold during a period. In other
words, it measures how many times a company sold its total average inventory dollar
amount during the year. A company with $1,000 of average inventory and sales of $10,000
effectively sold its 10 times over.

This ratio is important because total turnover depends on two main components of
performance. The first component is stock purchasing. If larger amounts of inventory are
purchased during the year, the company will have to sell greater amounts of inventory to
improve its turnover. If the company can’t sell these greater amounts of inventory, it will
incur storage costs and other holding costs.

The second component is sales. Sales have to match inventory purchases otherwise the
inventory will not turn effectively. That’s why the purchasing and sales departments must be
in tune with each other. (MyAccountingCourse.com, 2018)

Page 18 of 22
Accounts Payable Turnover Ratio

The accounts payable turnover ratio is a liquidity ratio that shows a company’s ability to pay
off its accounts payable by comparing net credit purchases to the average accounts payable
during a period. In other words, the accounts payable turnover ratio is how many times a
company can pay off its average accounts payable balance during the course of a year.

This ratio helps creditors analyze the liquidity of a company by gauging how easily a
company can pay off its current suppliers and vendors. Companies that can pay off supplies
frequently throughout the year indicate to creditor that they will be able to make regular
interest and principle payments as well.

Vendors also use this ratio when they consider establishing a new line of credit or floor plan
for a new customer. For instance, car dealerships and music stores often pay for their
inventory with floor plan financing from their vendors. Vendors want to make sure they will
be paid on time, so they often analyze the company’s payable turnover ratio.
(MyAccountingCourse.com, 2018)

Total Asset Turnover Ratio

Total asset turnover is a financial efficiency ratio that measures the ability of a company to
use its assets to generate sales. The total asset turnover ratio is calculated by dividing the
net sales by the average total assets. (MyAccountingCourse.com, 2018)

Fixed Asset Turnover

The fixed asset turnover ratio is an efficiency ratio that measures a company return on their
investment in property, plant, and equipment by comparing net sales with fixed assets. In
other words, it calculates how efficiently a company is a producing sales with its machines
and equipment.

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Investors and creditors use this formula to understand how well the company is utilizing
their equipment to generate sales. This concept is important to investors because they want
to be able to measure an approximate return on their investment. This is particularly true in
the manufacturing industry where companies have large and expensive equipment
purchases. Creditors, on the other hand, want to make sure that the company can produce
enough revenues from a new piece of equipment to pay back the loan they used to purchase
it.

Current Ratio

The current ratio is a liquidity and efficiency ratio that measures a firm’s ability to pay off its
short-term liabilities with its current assets. The current ratio is an important measure of
liquidity because short-term liabilities are due within the next year.

This means that a company has a limited amount of time in order to raise the funds to pay
for these liabilities. Current assets like cash, cash equivalents, and marketable securities can
easily be converted into cash in the short term. This means that companies with larger
amounts of current assets will more easily be able to pay off current liabilities when they
become due without having to sell off long-term, revenue generating assets.

Quick Ratio

The quick ratio or acid test ratio is a liquidity ratio that measures the ability of a company to
pay its current liabilities when they come due with only quick assets. Quick assets are
current assets that can be converted to cash within 90 days or in the short-term. Cash, cash
equivalents, short-term investments or marketable securities, and current accounts
receivable are considered quick assets.

Short-term investments or marketable securities include trading securities and available for
sale securities that can easily be converted into cash within the next 90 days. Marketable
securities are traded on an open market with a known price and readily available buyers.
Any stock on the New York Stock Exchange would be considered a marketable security
because they can easily be sold to any investor when the market is open.

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The quick ratio is often called the acid test ratio in reference to the historical use of acid to
test metals for gold by the early miners. If the metal passed the acid test, it was pure gold. If
metal failed the acid test by corroding from the acid, it was a base metal and of no value.

The acid test of finance shows how well a company can quickly convert its assets into cash in
order to pay off its current liabilities. It also shows the level of quick assets to current
liabilities.

Debt to Equity Ratio

The debt to equity ratio is a financial, liquidity ratio that compares a company’s total debt to
total equity. The debt to equity ratio shows the percentage of company financing that comes
from creditors and investors. A higher debt to equity ratio indicates that more creditor
financing (bank loans) is used than investor financing (shareholders).

Debt Ratio

Debt ratio is a solvency ratio that measures a firm’s total liabilities as a percentage of its
total assets. In a sense, the debt ratio shows a company’s ability to pay off its liabilities with
its assets. In other words, this shows how many assets the company must sell in order to pay
off all of its liabilities.

This ratio measures the financial leverage of a company. Companies with higher levels of
liabilities compared with assets are considered highly leveraged and more risky for lenders.

This helps investors and creditors analysis the overall debt burden on the company as well as
the firm’s ability to pay off the debt in future, uncertain economic times.

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Debt to Equity Ratio

The debt to equity ratio is a financial, liquidity ratio that compares a company’s total debt to
total equity. The debt to equity ratio shows the percentage of company financing that comes
from creditors and investors. A higher debt to equity ratio indicates that more creditor
financing (bank loans) is used than investor financing (shareholders).

Cash Earnings per Share (Cash EPS)

Cash Earnings per Share, also called Cash EPS, is a profitability ratio that measures the
financial performance of a company by calculating cash flows on a per share basis. Cash EPS
ignores’ all the non-cash items impacting the normal EPS to provide the real earnings
generated by the business.

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