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Unformatted text preview: Ratios Credit Analysis Liquidity (ShortTerm) Mesures the ability to meet shortterm obligations. 1. s liabilitie Current assets Current ratio Current = 2. s liabilitie Current A/R MS s equivalent Cash Cash ratio test  Acid + + + = 3. 360 / Sales A/R Average period Collection = gives the number of days on average it takes to collect A/R based on the yearend balance in A/R. 4. 360 / sales of Cost inventory Average inventory sell to Days = gives the number of days required for the company to sell its ending inventory assuming a given rate of sales. Capital structure and Solvency (LongTerm) Measures the ability to meet Longterm obligations 1. equity rs' Shareholde s liabilitie Total equity debt to Total = 2. equity rs' Shareholde s liabilitie term Long equity debt to Term Long = 3. expense Interest expense interest and taxes income before Income earned interest Times = gi ves the number of times the income generated before interest and tax covers the amount of interest expense, assuming that they represent the only fixed obligation. Note that the numerator is the EBIT. GCH, p. 312 is more specific. He underlines the fact that the primary analysis of the company’s ability to carry the debt as indicated by the income statement should include only income expected to occur in subsequent periods. He thus excludes the nonrecurring items. Also, the interest capitalized should be included with the total interest in the denominator because it is part of the interest payment. 1 (3) + (4) = x days of operating cycle A more sophisticated formula is the ratio called “earnings to fixed charged “, which is computed by dividing the total earnings by the total fixed charges. The times interest earned ratio is thus very simple but potentially misleading ....
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This note was uploaded on 06/11/2011 for the course ACCT 3607 taught by Professor Mike during the Spring '11 term at Assumption College.
 Spring '11
 mike

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