Chuong 9_SUMMARY_OF_FINANCIAL_RATIOS

5
SUMMARY OF FINANCIAL RATIOS
RATIO
METHOD OF
COMPUTATION
SIGNIFICANCE
Average
collection
period
Indicates days required
to convert receivables
into cash.
Accounts
receivable

Net sales / 360
6
SUMMARY OF FINANCIAL RATIOS
RATIO
METHOD OF
COMPUTATION
SIGNIFICANCE
Accounts
receivable
turnover
Indicates how many
times receivables are
collected during a year
on average.
Net sales

Accounts
receivable
7
SUMMARY OF FINANCIAL RATIOS
RATIO
METHOD OF
COMPUTATION
SIGNIFICANCE
Inventory
turnover
Measures efficiency of
the firm in managing
and selling inventory .
Cost of goods sold

Inventories
8
SUMMARY OF FINANCIAL RATIOS
RATIO
METHOD OF
COMPUTATION
SIGNIFICANCE
Fixed asset
turnover
Measures efficiency of
the firm in managing
fixed assets .
Net sales

Net property, plant,
and equipment
9
SUMMARY OF FINANCIAL RATIOS
RATIO
METHOD OF
COMPUTATION
SIGNIFICANCE
Total asset
turnover
Measures efficiency of
the firm in managing
all assets .
Net sales

Total assets
10
SUMMARY OF FINANCIAL RATIOS
RATIO
METHOD OF
COMPUTATION
SIGNIFICANCE
Debt ratio
Shows proportion of all
assets that are
financed with debt.
Total liabilities

Total assets
11
SUMMARY OF FINANCIAL RATIOS
RATIO
METHOD OF
COMPUTATION
SIGNIFICANCE
Long-term debt
to total
capitalization
Measures the extent to
which long-term debt is
used for permanent
financing.
Long-term debt

Long-term debt +
Stockholders’ equity
12
SUMMARY OF FINANCIAL RATIOS
RATIO
METHOD OF
COMPUTATION
SIGNIFICANCE
Debt to equity
Measures debt relative
to equity base.
Total liabilities

Stockholders’ equity
13
SUMMARY OF FINANCIAL RATIOS
RATIO
METHOD OF
COMPUTATION
SIGNIFICANCE
Times interest
earned
Measures how many
times interest expense
is covered by operating
earnings.
Operating profit

Interest expense
14
SUMMARY OF FINANCIAL RATIOS
RATIO
METHOD OF
COMPUTATION
SIGNIFICANCE
Fixed charge
coverage
Measures coverage
capability more broadly
than times interest
earned by including
lease payments as a
fixed expense.
Operating profit +
Lease payments

Interest expense +
Lease payments

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