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Liquidity Ratios:
Bankers/Suppliers are interested in this
Working capital
= Current assets – Current liabilities
Current Ratio
= Current assets / Current liabilities (.75)
.75 ratio means that for every dollar of current liabilities, they have
.75 of
current assets. Higher ratio means better liquidity.
Current cash debt coverage ratio
= CFFO/ Avg(use y/e) current liabilities (.44)
Current ratio is disadvantaged because they use yearend balances
and this one uses cash provided by operating activities rather than a
balance at one point.
.40 is healthy ratio
Inventory turnover ratio
= Cost of goods sold / Avg. (use y/e) inventories (8.3)
Measures the # of times on avg. a company sells the inventory during the
period. It measure liquidity of the inventory. The higher the ratio, the faster
the inventory can be sold.
Days supply of inventory
= 365 / Inventory turnover ratio (45.6)
Variant of inventory turnover ratio which measures the # of days it takes it
takes to sell the inventory.
Receivables turnover ratio
= Net credit sales (use total sales)/ avg (use y/e) net
receivables (12.5)
Asses the liquidity of the receivables by measuring the number of times, on
avg., a company collects receivables during the period. The higher the ratio,
the better and more liquid the receivables are.
Avg. Collection period
= 365 / Receivables turnover ratio (29.9)
A variant of receivables turnover ratio converts it into an avg. collection
period in days. The general rule is that the collection period shouldn't greatly
exceed the credit term period.
Cash to cash operating cycle
= Days supply of inv. + collection period (328)
Solvency Ratios:
Longterm creditors and stockholders are interested.
Debt to total assets ratio
= Total liabilities / total assets (79%)
This ratio indicates the degree of financial leveraging. The higher the
percentage, the greater the risk the company may be unable to meet it's
maturing obligations. The lower the ratio, the more equity buffer is available
to creditors if the company becomes insolvent. For creditors, low ratio of
debt to total assets is desirable. “EQUITY CUSHION”
50% debt to equity ratio is “strong”.
Cash debt coverage ratio
= CFFO / avg. (use y/e) total liabilities (.14)
Cashbasis measure of solvency. Indicates a company's ability to repay its
liabilities from cash generated from operating activities w/o having to
liquidate the assets used in its operations. One way of interpretation: If
company ratio is .14, then net cash generated from one year of operations
would be sufficient to pay off 14% of it's total liabilities. .20 is “acceptable”
Times interest earned
= Net income+ interest exp. + tax exp / interest exp (5.2)
Danger mark is 2.00 Measure of a co.'s ability to honor its debt payments
Free cash flow
= CFFO – Capital expenditures – Dividends paid ($523 mil)
An indication of a company's solvency, ability to pay dividends or expand
operations, is the amount of excess cash is generated after investing to
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 Fall '07
 Loster

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