ratio

Examples of ratio in the following topics:

• Using the Receivables Turnover Ratio

  • The receivables turnover ratio measures how efficiently a firm uses its assets.
  • The receivables turnover ratio, also called the debtor's turnover ratio, is an accounting measure used to measure how effective a company is in extending credit as well as collecting debts.
  • The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.
  • A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient; in contrast, a low ratio implies the company is not making the timely collection of credit.
  • Sometimes the receivables turnover ratio is expressed as the "days' sales in receivables":

• Acid Test Ratio

  • The acid-test ratio, also known as the quick ratio, measures the ability of a company to use its near cash or quick assets to immediately extinguish or retire its current liabilities.
  • The acid-test ratio, like other financial ratios, is a test of viability for business entities but does not give a complete picture of a company's health.
  • Generally, the acid test ratio should be 1:1 or higher; however, this varies widely by industry.
  • A low acid-test ratio may be a sign of poor use of cash by a business.
  • The acid-test ratio is similar to the current ratio except the value of inventory is omitted from the calculation.

• Current Ratio

  • The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months.
  • The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months.
  • Along with other financial ratios, the current ratio is used to try to evaluate the overall financial condition of a corporation or other organization.
  • This can allow a firm to operate with a low current ratio.
  • The current ratio can be use to evaluate a company's liquidity.

• Efficiency Metrics

  • Efficiency ratios for inventory measure how effectively a business uses its inventory resources.
  • An efficiency metric or ratio, sometimes referred to as an activity ratio, is a type of financial ratio.
  • Ratios can be expressed as a decimal value, such as 0.10, or given as an equivalent percent value, such as 10%.
  • Some ratios are usually quoted as percentages, especially ratios that are usually or always less than 1, while others are usually quoted as decimal numbers, especially ratios that are usually more than 1.
  • The inventory turnover ratio is a measure of the number of times inventory is sold or used in a time period, such as a year.

• Times Interest Earned Ratio

  • Times Interest Earned Ratio = (EBIT or EBITDA) / (Required Interest Payments), and is indicative of a company's financial strength.
  • Times Interest Earned Ratio = Earnings before Interest and Taxes (EBIT) / Interest Expense.
  • Analysts will sometimes use EBITDA instead of EBIT when calculating the Times Interest Earned Ratio.
  • Typically, a Times Interest Earned Ratio below 2.5 is considered a warning sign of financial distress.
  • The Times Interest Earned Ratio is an indication of a company's overall financial health.

• Asset Turnover Ratio

  • One way of putting those values into context is to use them to generate ratios.
  • One ratio that analysts use to evaluate a company's strength is the asset turnover ratio.
  • The fixed-asset turnover ratio is calculated in a similar manner, except instead of focusing all of the business's assets, the ratio is calculated using the business's fixed assets.
  • However, these ratios generally need context to better understand them.
  • Generally, an analyst will compare a business's asset turnover ratio to the business's ratios from prior accounting periods or to the business's competitor's asset turnover ratio for the same period.

• Debt-to-Equity Ratio

  • The Debt-to-Equity Ratio is a financial ratio that compares the debt of a company to its equity and is closely related to leveraging.
  • The Debt-to-Equity Ratio is a financial ratio indicating the relative proportion of shareholder's equity and debt used to finance a company's assets, and is calculated as total debt / total equity.
  • Calculating a company's debt to equity ratio is straight forward, and the debt and equity components can be found on a company's respective balance sheet.
  • For more advanced analysis, financial analysts can calculate a company's debt to equity ratio using market values if both the debt and equity are publicly traded.
  • This means that other short-term liabilities, such as accounts payable, are excluded when calculating the debt-to-equity ratio.

• Analyzing Long-Term Liabilities

  • Analyzing long-term liabilities combines debt ratio analysis, credit analysis and market analysis to assess a company's financial strength.
  • In addition to credit rating agencies such as Standard & Poor's, analysts can use debt ratios to help benchmark a company to it's industry peers.
  • Popular debt ratios include: debt ratio, debt to equity, long-term debt to equity, times interest earned ratio (interest coverage ratio), and debt service coverage ratio.
  • Data used to calculate these ratios are provided on a company's balance sheet, income statement, and statement of changes in equity.
  • There is more to analyzing long-term liabilities than simply reading a company's credit rating and performing independent debt ratio analysis.

• Return on Assets

  • The Return on Total Assets ratio measures how effectively a company uses its assets to generate its net income.
  • The Return on Total Assets ratio is similar to the Asset Turnover Ratio in that both measure how effective a business's assets are in generating returns for the business.
  • But while the asset turnover ratio is focused on the business's sales, return on assets is focused on net income.
  • The greater the value of the ratio, the better a company is performing.
  • This is generally done by comparing the current return on assets ratio to the company's past performance or to a competitor's ratio.

• Income Statement Analyses

  • Price to Earnings Ratio = Market Value of Stock / Earnings per Share
  • A higher P/E ratio means that investors are paying more for each unit of current net income, so the stock is more "expensive" than one with a lower P/E ratio.
  • The P/E ratio can be regarded as being expressed in years.
  • In railroading, an operating ratio of 80 or lower is considered desirable.
  • The ratio does not factor in expansion or debt repayment.