Problem#1

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Problem#2 Prob#1

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 12-4

Receivables Turnover Ratio

Measures how many times receivables are collected during the year
Low ratio indicates trouble collecting its accounts receivable
High ratio indicates quick collection of receivables into cash

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 12-5

Average Collection Period

Days it takes to convert receivables into cash

Higher receivables turnover ratio, shorter collection period is better

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 12-6

Inventory Turnover Ratio

Measures how many times average inventory is sold during the year
High ratio indicates that inventory is selling quickly
Extremely high ratio might indicate inventory shortages

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 12-7

Average Days in Inventory

Days it takes to sell inventory

Lower is better

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 12-8

Current Ratio

Compares current assets to current liabilities

High ratio indicates sufficient assets to cover current liabilities
However, A too high current ratio may indicate a company has too
much current assets (receivables or inventory).
Liquid asset
1.Cash
2.Short-term investment
3. Accounts receivable
4. Inventory
5. Prepaid expense

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 12-9

Acid-Test Ratio quick ratio

More conservative measure of ability to pay current liabilities

Ignores current assets such as inventories and prepaid expenses
Inventory and prepaid expenses are less readily convertible into cash.
Ratio>1, usually means a company has enough liquid assets available to
pay current liabilities as they become due.

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 12-10

Debt to Equity Ratio

Indicates the risk of bankruptcy

Higher ratio indicates higher risk

debt to asset ratio = total liabilities/ total assets

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 12-11

Times Interest Earned Ratio

Compares interest payments with income available to pay them

Income before interest expense and income taxes better indicates the
amount available to pay the interest.

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 12-12

Gross Profit Ratio

Indicates the portion of each dollar of sales above its cost of goods sold

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 12-13

Return on Assets (ROA)

Measures the income the company earns on each dollar invested

in assets

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 12-14

Profit Margin

Measures the income earned on each dollar of net sales

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 12-15

Asset Turnover

Measures sales volume in relation to the investment in

assets

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 12-16

Return on Equity (ROE)

Measures the income earned for each dollar in

stockholders equity

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 12-17

Price-Earnings Ratio
Compares a companys share price with its earnings per share.
Indication of investors expectations of future earnings.
Stocks commonly trade at a P/E ratio somewhere between 15 and 20
However, if the ratio is two high, it may indicate that stock price is
too high relative to earnings per shares, that is, the stock is
overpriced.

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