Financial ratios - LIQUIDITY The current ratio Total Current Assets Total Current Liabilities If the current ratio is less than 1 assets do not

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ACTIVITY Total Asset Turnover Ratio Revenues ÷ Total Assets Are assets effectively generating sales? The bigger the ratio the better Inventory Turnover Ratio Cost of goods sold ÷ (average) inventory sold? Receivables Turnover Ratio Total Revenues÷ Average Receivables Average Collection Period Days in period ÷ Receivables Turnover Ratio These give an indication of how quickly the firm’s customers pay bills It is an indication of how credit is granted LIQUIDITY The current ratio: Total Current Assets ÷ Total Current Liabilities If the current ratio is less than 1 assets do not cover liabilities Acid test (quick) ratio (Total Current Assets – Inventory) ÷ Total Current Liabilities A more stringent test than the current ratio Solvency Ratio Net Worth ÷ Total assets Net Working Capital Current Assets – Current liabilities FINANCIAL LEVERAGE Debt Ratio Total Liabilities ÷ Total Assets A higher number means the firm is more “leveraged” It relies more on borrowing Corporate Earnings Bottom Line: Total Revenue – Total Costs Net Profit Margin Net income ÷ Total Revenue Gross Profit Margin EBTI ÷ Total Revenue Profit margins will be in percentages Less than 100% FIRM VALUE Market Value (Publicly Traded Company) Price per share of stock X number of outstanding shares Book Value Total Assets – Total Liabilities Look Familiar? It’s Owners’ equity or Net worth Note: The replacement cost of an asset may exceed its book value Book value per share: Net worth ÷ Outstanding Shares 5 forms of finance debt equity cash (retained earnings) govt gift (fundraising) US Financial Systems Financial Markets Stock Markets Bond Markets Financial Intermediaries
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This note was uploaded on 04/17/2009 for the course KINS 4520 taught by Professor Maxcy during the Spring '09 term at University of Georgia Athens.

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Financial ratios - LIQUIDITY The current ratio Total Current Assets Total Current Liabilities If the current ratio is less than 1 assets do not

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