Liquidity ratios Liquidity ratios measure the ability of a company to repay its short-term debts and meet unexpected cash needs Current ratio. The current ratio is also called the working capital ratio, as working capital is the difference between current assets and current liabilities. This ratio measures the ability of a company to pay its current obligations using current assets. The current ratio is calculated by dividing current assets by current liabilities Current Assets Current Ratio Current Liabilitics Acid-test ratio. The acid-test ratio is also called the quick ratio. Quick assets are defined as cash, marketable (or short-term) securities, and accounts receivable and notes receivable, net of the allowances for doubtful accounts. These assets are considered to be very liquid (easy to obtain cash from the assets) and therefore, available for immediate use to pay obligations. The acid-test ratio is calculated by dividing quick assets by current liabilities Quick Assets Acid-Test Ratio The traditional rule of thumb for this ratio has been 1:1. Anything below this level requires further analysis of receivables to understand how often the company turns them into cash. It may also indicate the company needs to establish a line of credit with a financial institution to ensure the company has access to cash when it needs to pay its obligations Receivables turnover. The receivable turnover ratio calculates the number of times in an operating cycle (normally one year) the company collects its receivable balance. It is calculated by dividing net credit sales by the average net receivables. Net credit sales is net sales less cash sales. If cash sales are unknown, use net sales. Average net receivables is usually the balance of net receivables at the beginning of the year plus the balance of net receivables at the end of the ar divided by two. If the company is cyclical, an average calculated on a reasonable basis f the company's operations should be used such as monthly or quarterly Receivables Turnover Average Net Receivabl Average collection period. The average collection period (also known as day's sales outstanding) is a variation of receivables turnover. It calculates the number of days it will take to collect the average receivables balance. It is often used to evaluate the effectiveness of a company's credit and collection policies. A rule of thumb is the average collection period should not be significantly greater than a company's credit term period. The average collection period is calculated by dividing 365 by the receivables turnover ratio. 365 days Average Collection Period - Inventory turnover. The inventory turnover ratio measures the number of times the company sells its inventory during the period. It is calculated by dividing the cost of goods sold by average inventory. Average inventory is calculated by adding beginning inventory and ending inventory and dividing by 2. If the company is cyclical, an average calculated on a reasonable basis for the company's operations should be used such as monthly or quarterly. Cost of Goods Sold Average Inventory Inventory Turnover Ratio Day's sales on hand. Day's sales on hand is a variation of the inventory turnover. It calculates the number of day's sales being carried in inventory. It is calculated by dividing 365 days by the inventory turnover ratio. Day's Sales on Hand day Inventory Turnover Profitability ratios Profitability ratios measure a company's operating efficiency, including its ability to generate income and therefore, cash flow. Cash flow affects the company's ability to obtain debt and equity financing. Profit margin. The profit margin ratio, also known as the operating performance ratio measures the company's ability to turn its sales into net income. To evaluate the profit margin, it must be compared to competitors and industry statistics. It is calculated by dividing net income by net sales Net Income Eamings Per Share Weighted Average Common Shares Outstanding Average Price-earnings ratio. The price-earnings ratio (P/E) is quoted in the financial press daily. It represents the investors' expectations for the stock. A P/E ratio greater than 15 has historically been considered high. Price Earnings ratio Market price per common share share Payout ratio. The payout ratio identifies the percent of net income paid to common stockholders in the form of cash dividends, It is calculated by dividing cash dividends by net income Payout Ratio A more stable and mature company is likely to pay out a higher portion of its earnings as dividends. Many startup companies and companies in some industries do not pay out dividends. It is important to understand the company and its strategy when analyzing the payout ratio. Dividend yield. Another indicator of how a corporation performed is the dividend yield. It measures the return in cash dividends earned by an investor on one share of the company's stock. It is calculated by dividing dividends paid per share by the market price of one common share at the end of the period Dividends Paid Per Share Dividend Yield A low dividend yield could be a sign of a high growth company that pays little or no dividends and reinvests earnings in the business or it could be the sign of a downturn in the business. It should be investigated so the investor knows the reason it is low Solvency ratios Solvency ratios are used to measure long-term risk and are of interest to long-term creditors and stockholders Debt to total assets ratio. The debt to total assets ratio calculates the percent of assets provided by creditors. It is calculated by dividing total debt by total assets. Total debt is the same as total liabilities. Times interest earned ratio. The times interest earned ratio is an indicator of the company's ability to pay interest as it comes due. It is calculated by dividing earnings before interest and taxes (EBIT) by interest expense. nterest Income Tax Expense (EBIT) Interest Expense Times interest earned also called earnings A times interest earned ratio of 2-3 or more indicates that interest expense should be covered. If the times interest earned ratio is less than two it will be difficult to find a bank to loan money to the business 1) Some of the ratios do NOT have sufficient data to compute a ratic In those ratios, simply type "Insufficient data to Compute" The objective is to provide you an opportunity to employ critical thinking. You need to be able to discern whether or not all elements are present. 2) In the ratios that require an "Average" assume that the BEGINNING Account Balance o 3) Remember, .50% is NOT the same as 50%. 4) Use all transactions that include "Sales on Account" as "Net Credit Sales" 5) Be sure to include your formulas in the proper cell. If you simply input an answer, feedback may b 7 If you include your computations, additional feedback will be possible when an incorrect answer is given. 9 6) Complete all ratios in all 3 sections Part e limited. s A, B & C. There are 4 ratios in Part A, 2 in Part B, and 3 in Part C .2 Step 2: Review Ratio Sheet Review the AC499 Financial Report Analysis Unit 4 Ratio Sheet Step 3: Financial Analysis Complete a financial analysis of the company financials for Quixote Consulting. Use the Excol Templato titled: "Unit 4 Financial Report Analysis Template: Bo sure to reviow the Excel tab t the Assignment tab. titled "Hints & Instructions" before you attempt Liquidity ratios Liquidity ratios measure the ability of a company to repay its short-term debts and meet unexpected cash needs Current ratio. The current ratio is also called the working capital ratio, as working capital is the difference between current assets and current liabilities. This ratio measures the ability of a company to pay its current obligations using current assets. The current ratio is calculated by dividing current assets by current liabilities Current Assets Current Ratio Current Liabilitics Acid-test ratio. The acid-test ratio is also called the quick ratio. Quick assets are defined as cash, marketable (or short-term) securities, and accounts receivable and notes receivable, net of the allowances for doubtful accounts. These assets are considered to be very liquid (easy to obtain cash from the assets) and therefore, available for immediate use to pay obligations. The acid-test ratio is calculated by dividing quick assets by current liabilities Quick Assets Acid-Test Ratio The traditional rule of thumb for this ratio has been 1:1. Anything below this level requires further analysis of receivables to understand how often the company turns them into cash. It may also indicate the company needs to establish a line of credit with a financial institution to ensure the company has access to cash when it needs to pay its obligations Receivables turnover. The receivable turnover ratio calculates the number of times in an operating cycle (normally one year) the company collects its receivable balance. It is calculated by dividing net credit sales by the average net receivables. Net credit sales is net sales less cash sales. If cash sales are unknown, use net sales. Average net receivables is usually the balance of net receivables at the beginning of the year plus the balance of net receivables at the end of the ar divided by two. If the company is cyclical, an average calculated on a reasonable basis f the company's operations should be used such as monthly or quarterly Receivables Turnover Average Net Receivabl Average collection period. The average collection period (also known as day's sales outstanding) is a variation of receivables turnover. It calculates the number of days it will take to collect the average receivables balance. It is often used to evaluate the effectiveness of a company's credit and collection policies. A rule of thumb is the average collection period should not be significantly greater than a company's credit term period. The average collection period is calculated by dividing 365 by the receivables turnover ratio. 365 days Average Collection Period - Inventory turnover. The inventory turnover ratio measures the number of times the company sells its inventory during the period. It is calculated by dividing the cost of goods sold by average inventory. Average inventory is calculated by adding beginning inventory and ending inventory and dividing by 2. If the company is cyclical, an average calculated on a reasonable basis for the company's operations should be used such as monthly or quarterly. Cost of Goods Sold Average Inventory Inventory Turnover Ratio Day's sales on hand. Day's sales on hand is a variation of the inventory turnover. It calculates the number of day's sales being carried in inventory. It is calculated by dividing 365 days by the inventory turnover ratio. Day's Sales on Hand day Inventory Turnover Profitability ratios Profitability ratios measure a company's operating efficiency, including its ability to generate income and therefore, cash flow. Cash flow affects the company's ability to obtain debt and equity financing. Profit margin. The profit margin ratio, also known as the operating performance ratio measures the company's ability to turn its sales into net income. To evaluate the profit margin, it must be compared to competitors and industry statistics. It is calculated by dividing net income by net sales Net Income Eamings Per Share Weighted Average Common Shares Outstanding Average Price-earnings ratio. The price-earnings ratio (P/E) is quoted in the financial press daily. It represents the investors' expectations for the stock. A P/E ratio greater than 15 has historically been considered high. Price Earnings ratio Market price per common share share Payout ratio. The payout ratio identifies the percent of net income paid to common stockholders in the form of cash dividends, It is calculated by dividing cash dividends by net income Payout Ratio A more stable and mature company is likely to pay out a higher portion of its earnings as dividends. Many startup companies and companies in some industries do not pay out dividends. It is important to understand the company and its strategy when analyzing the payout ratio. Dividend yield. Another indicator of how a corporation performed is the dividend yield. It measures the return in cash dividends earned by an investor on one share of the company's stock. It is calculated by dividing dividends paid per share by the market price of one common share at the end of the period Dividends Paid Per Share Dividend Yield A low dividend yield could be a sign of a high growth company that pays little or no dividends and reinvests earnings in the business or it could be the sign of a downturn in the business. It should be investigated so the investor knows the reason it is low Solvency ratios Solvency ratios are used to measure long-term risk and are of interest to long-term creditors and stockholders Debt to total assets ratio. The debt to total assets ratio calculates the percent of assets provided by creditors. It is calculated by dividing total debt by total assets. Total debt is the same as total liabilities. Times interest earned ratio. The times interest earned ratio is an indicator of the company's ability to pay interest as it comes due. It is calculated by dividing earnings before interest and taxes (EBIT) by interest expense. nterest Income Tax Expense (EBIT) Interest Expense Times interest earned also called earnings A times interest earned ratio of 2-3 or more indicates that interest expense should be covered. If the times interest earned ratio is less than two it will be difficult to find a bank to loan money to the business 1) Some of the ratios do NOT have sufficient data to compute a ratic In those ratios, simply type "Insufficient data to Compute" The objective is to provide you an opportunity to employ critical thinking. You need to be able to discern whether or not all elements are present. 2) In the ratios that require an "Average" assume that the BEGINNING Account Balance o 3) Remember, .50% is NOT the same as 50%. 4) Use all transactions that include "Sales on Account" as "Net Credit Sales" 5) Be sure to include your formulas in the proper cell. If you simply input an answer, feedback may b 7 If you include your computations, additional feedback will be possible when an incorrect answer is given. 9 6) Complete all ratios in all 3 sections Part e limited. s A, B & C. There are 4 ratios in Part A, 2 in Part B, and 3 in Part C .2 Step 2: Review Ratio Sheet Review the AC499 Financial Report Analysis Unit 4 Ratio Sheet Step 3: Financial Analysis Complete a financial analysis of the company financials for Quixote Consulting. Use the Excol Templato titled: "Unit 4 Financial Report Analysis Template: Bo sure to reviow the Excel tab t the Assignment tab. titled "Hints & Instructions" before you attempt