Inventory turnover ratio is a measure of how quickly

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Chapter 10 / Exercise 19
Financial Markets & Institutions
Madura
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Inventory Turnover Ratio is a measure of how quickly the firm sells its average inventory. The faster that accounts receivable are collected, the better for the company. Further, since the desire should be to keep inventory at absolute minimum, a higher inventory turnover is likely better than a lower one in that a small inventory should turnover much faster than a larger one. Of course, this measure is not useful for companies using Just-in-Time inventories or virtual inventories.
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Chapter 10 / Exercise 19
Financial Markets & Institutions
Madura
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88 Operating Ratios Assesses Effective Use of Resources Assets Turnover Ratio ATR = Sales / Average Total Assets* *Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2 Accounts Receivable Turnover Ratio ARTR = Net Credit Sales / Average Accounts Receivable* *Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2 Inventory Turnover Ratio ITR = Cost of Goods Sold / Average Inventory* *Average inventory = (Beginning Inventory + Ending Inventory) / 2 Solvency deals with the company’s ability to survive in the long run. Solvency ratios are intended to help the analyst assess the company’s viability in the long run its going-concern potential. The Debt-to-Equity Ratio indicates the percentage of the firm’s tota l financing (which includes both debt and equity financing) that is in the form of debt. Generally there is an optimal balance between debt and equity financing for certain industries; however, if a company is having trouble paying its debt, equity financing likely is always preferable. The Interest Coverage Ratio (also called the Times Interest Earned ratio) indicates the number of times that the interest expense is earned. Lenders are very interested in this ratio, as it helps them determine if the company will be able to continue paying interest on its debt. Remember that often lenders are only interested in being paid interest each quarter and that the principal on the debt can be held by the borrower for a long time. However, the inability to cover interest charges indicates a serious problem. Minimum solvency ratio measures are common in debt covenants. Solvency Ratios Assesses Long-Term Ability to Survive Debt to Equity Ratio DE Ratio = Total Debt / Total Equity Interest Coverage Ratio or Times Interest Earned Ratio ICR = Net income plus interest expense plus income tax expense / Interest Expense
89 Marketability ratios are intended to measure how the wide stock market views the company. Dividend Yield and Dividend Payouts are important to investors who are interested in receiving regular earnings from stock investments and comparing the relative dividends paid by different companies. These are important to institutional investors and senior citizens alike who want to avoid risk but want a reasonable return. The Price-Earnings Ratio is another measure of yield on individual stock investments, measuring the earnings per share as a percentage of the market price of the stock. Those who are interested in purchasing entire companies use the Market-to-Book Ratio often. This is a measure of the market price of the stock as compared to the book value of the stock. Companies often pay

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