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Ratios cont'd.docx

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Wilfrid Laurier University
Roopa Reddy

Why Evaluate Financial Performance? -Looking to see if a company is profitable and if they are good with their money -Government, competitors, creditor, investors, and employees look at these finances Ratio Ratio Name Category Formula Benchmark Definition Current Ratio Liquidity average current assets Greater than 2 Ability to pay short term average current liabilities Less than 4 obligations Acid Ratio Liquidity (Average Current Assets – Greater than 1 How quickly your assets Average Inventories) can turn to cash – Average Current Liabilities excluding Inventory NWC – Net Working Liquidity Average current assets – average The higher the How much money you Capital to Total current liabilities more liquid you have to work with after Assets Ratio Average total assets are you pay your debt Inventory to Sale Conversion average inventory How long it takes for your Period Cost of goods sold / 365 inventory to be sold – days Sale to Cash Conversion Average receivables Want close to 0 How long it takes for you Period Net sales / 365 to collect that money -you have to line up with when you owe money so you have cash flow Average Operating Conversion inventory to sale + sale to cash How long it takes for Cycle Period inventory to convert to sale and then the sale to actual cash Purchase to Conversion Average payables + average -the higher it is, How long it takes to pay Payment Period accrued liabilities the more you things off Cost of goods sold / 365 rely on credit Cash Conversion Conversion Inventory to Sale + Sale to Cash – Want to be as -looking at everything as Cycle (C ) Period Purchase to Payment close to 0 as a whole – selling your possible – so inventory, getting cash, you pay your and paying off your debt bills on time – keep cash flow Total Debt to Total Leverage average total debt How much debt you have Assets Average total assets compared to how many assets you have Debt to Equity Leverage average total debt How much debt you owe average owner’s equity compared to how much money you have (from equity) -5:1 – $5 in debt to $1 dollar in equity (compare to the industry) K n Current Liabilities to Leverage average current liabilities average How much of your debt is Total Debt total liabilities due now, and how much o is due later w Interest Coverage Leverage EBITDA (EBIT – just add back You want high – How many times you can depreciation – because it is not less risky cover your interest t an actual cash expense payments h Interest
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