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Unformatted text preview: vided by the average balance of inventory. The higher the
turnover, the better for cash ﬂow and working capital requirements. • Accounts Payable Turnover: a measure of how quickly the business pays its bills. It divides the
total new accounts payable for the year by the average accounts payable balance. • Total Assets Turnover: sales divided by total assets. DEBT RATIOS Debt ratios look at what you owe.
• Debt to Net Worth: total liabilities divided by total net worth. • Short-term Debt to Liabilities: short-term debt divided by total liabilities. This is a measure
of the depth and term of debt. CHAPTER 17: FINISH THE FINANCIALS 17.5 LIQUIDITY RATIOS Liquidity ratios focus on cash position and ability to meet obligations.
• Current Ratio: short-term assets divided by short-term liabilities. This gives a view of a business’ cash position and ability to meet short-term commitments. • Quick Ratio: this is the same as the current ratio, except that inventories are ﬁrst subtracted
from short-term assets before they are divided by short-term liabilities. Many ﬁnancial experts
consider this a better measurement of liquidity than the current ratio, because inventory is so
often not convertible to real cash in a short period of time. • Net Working Capital: subtract short-term liabilities from short-term assets. This is another
measure of cash position. • Interest Coverage: proﬁt before interest and taxes (operating proﬁt) divided by total interest
payments. A measure of how much a business is burdened by servicing its own debt. These are all measures of the overall ﬁnancial position of a company and its ability to pay its debt.
They are very important to bankers and for loan applications. The acid test (included with additional
ratios in the following section) is generally considered the best measure of a company’s ability to pay
all its obligations without problems. Acceptable measures vary by industry. Some industries are quite
heavy on plant and equipment assets, and othe...
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This note was uploaded on 01/26/2014 for the course BUINESS 102 taught by Professor Unknown during the Winter '09 term at University of Phoenix.
- Winter '09