Purpose Understand the information provided by the current ratio and.pdf
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Purpose: Understand the information provided by the current ratio and the debt ratio. Liquidity and Solvency Ratios measure the ability to meet financial obligations and the level of financial risk. The Current Ratio measures the ability to pay current payables as they come due by comparing current assets to current liabilities. It is a measure of short-term liquidity. A higher ratio indicates a stronger ability to pay current debts. The Debt Ratio measures the proportion of assets financed by debt by comparing total liabilities to total assets. It is a measure of long-term solvency. A higher ratio indicates greater financial risk. Use the chart above to answer the following questions. Stock symbols are shown in parentheses. Q1 Of the above three restaurant chains, which is your favorite? (DIN / DRI / NATH) - DIN operates Applebee's Neighborhood Grill \& Bar and IHOP. - DRI operates Red Lobster, Olive Garden, Bahama Breeze, and Smokey Bones Barbeque and Grill. - NATH operates Nathan's Famous. Q2 (DIN / DRI / NATH) have sufficient current assets to pay off current liabilities and, therefore, have a current ratio (greater / less) than 1.0. A current ratio that is (lower / higher) than the industry average may indicate a lack of short-term liquidity, which includes (DIN / DRI / NATH). Does this indicate that this corporation is insolvent or unable to pay its bills? (Yes / No) Explain. Q3 (DIN / DRI / NATH) are relying more on debt to finance assets and have a debt ratio (greater / less) than 50%. Darden Restaurants is financing \% of assets with debt. For a company wanting to be lower risk and less dependent on debt, a (n) (increasing / decreasing) trend in the debt ratio is considered favorable. A company that has higher financial risk will, in general, be required to pay (higher / lower) interest rates when borrowing money. Q4 Why does a company with a higher debt ratio tend to have greater financial risk? Q5 Does a high debt ratio indicate a weak corporation? (Yes / No) Explain your answer. - Instead of reporting the Debr Ratia, some finoncial saarces nepert the Debt-ta-Equity rutia, computed as liabilinies divided by.
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This document discusses ratio analysis and its use in analyzing a firm's financial statements. It introduces several important ratios categorized into liquidity, leverage, repayment capacity, efficiency, and profitability. Liquidity ratios like the current ratio and quick ratio measure a firm's ability to meet short-term obligations. Leverage ratios like the debt ratio and debt-to-equity ratio indicate the relative proportion of debt and equity used to finance assets. Repayment capacity ratios like times interest earned examine the ability to satisfy fixed payment obligations. The document provides the formulas and explanations of key ratios and uses a sample company to illustrate calculated ratios.
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a.Times Interest Earned Ratio = EBIT interest ExpenseFor 2014.pdf
a.
Times Interest Earned Ratio = EBIT / interest Expense
For 2014: $8,799 / $600 = 14.7 times
For 2015: $9,454 / $838 = 11.3 times
For 2016: $10,338 / $1,058 = 9.8 times
The TImes Interest Earned (TIE) Ratio measures the operating income level that can be used for
interest payments in the future, i.e. how many times the Company can make the interest
payments. It is a solvency ratio since it measures the Company\'s ability to service it\'s debt
interest obligations. Hence, the higher the ratio, the more favorable is the company\'s liquidity
position.
In the given question, we can observe that the ratio has consistently decreased year on year. This
implies that the Company\'s debt has increased while the increase in operating income has not
been at the same pace. The Company can afford to service interest fewer times each year from
2014 to 2016. This implies that the Company has become comparatively more risky than before
from the Creditor\'s standpoint.
b. Current Ratio = Current Assets / Current Liabilities
For 2014: $25,983 / $19,027 = 1.4
For 2015: $29,158 / $23,169 = 1.3
For 2016: $31,042 / $26,250 = 1.2
The Current Ratio is an indicator of how efficiently the Company manages it\'s operating cycle.
A higher Current Ratio implies that the COmpany is in a better position to discharge all it\'s short
term obligations without affecting or jeopardising it\'s working capital requirements. On the
flipside, a ratio that is too high indicates that the Company\'s current assets are lying idle or that
it is not efficiently using short term funds.
In the Given case, the Company\'s current ratio shows a steady decline. However, the lowest is
1.2 times, which implies that the Company is still sufficiently liquid. This is becase even at the
lowest, the Company\'s Current Assets can pay off the Current Liabilities 1.2 times without
affecting working capital cycle for regular business needs.
Hence, as per the options given, we can say that CVS’s current ratio has decreased over the past
three years, however, it is greater than 1 indicating CVS is liquid.
c. Total Liabilities to Equity Ratio = Total Liabilities / Total Equity
For 2014: $36,224 / $37,963 = 0.95
For 2015: $55,234 / $37,203 = 1.5
For 2016: $57,628 / $36,834 = 1.6
Total Liabilities include all the claims, long term and short term, against the Company\'s
Assets. Total Liabilities to Equity Ratio indicates how much of the Company\'s Assets are
funded by creditors versus how much is funded by the equity holders. Broadly, a 1:1 ratio is
considered acceptable for most industries. Creditors would prefer a lower ratio as this implies
their money is at less risk. However, equity holders would like to benefit from the risk taken by
them due to the Company using debt, and would prefer a higher ratio.
In the given case, this ratio is increasing year on year. This implies that the COmpany is taking
on more debt financing. This implies that the Company has more risk overall, although it
benefits the equity .
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This document analyzes the financial ratios and position of D'Leon, a company, compared to industry averages. It finds that in 2015, D'Leon's current ratio was above average but quick ratio was below. While liquidity has improved, other ratios like inventory turnover, days sales outstanding, and asset turnover indicate inefficient asset management. Specifically, D'Leon holds too much inventory and collects payments too slowly. Additionally, its debt ratio, basic earning power, return on assets and equity are below industry averages, suggesting weak financial returns. Overall, the document finds that while liquidity is improving, D'Leon is not utilizing assets efficiently and has weak financial leverage compared to its industry.
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a.Times Interest Earned Ratio = EBIT interest ExpenseFor 2014.pdf
a.
Times Interest Earned Ratio = EBIT / interest Expense
For 2014: $8,799 / $600 = 14.7 times
For 2015: $9,454 / $838 = 11.3 times
For 2016: $10,338 / $1,058 = 9.8 times
The TImes Interest Earned (TIE) Ratio measures the operating income level that can be used for
interest payments in the future, i.e. how many times the Company can make the interest
payments. It is a solvency ratio since it measures the Company\'s ability to service it\'s debt
interest obligations. Hence, the higher the ratio, the more favorable is the company\'s liquidity
position.
In the given question, we can observe that the ratio has consistently decreased year on year. This
implies that the Company\'s debt has increased while the increase in operating income has not
been at the same pace. The Company can afford to service interest fewer times each year from
2014 to 2016. This implies that the Company has become comparatively more risky than before
from the Creditor\'s standpoint.
b. Current Ratio = Current Assets / Current Liabilities
For 2014: $25,983 / $19,027 = 1.4
For 2015: $29,158 / $23,169 = 1.3
For 2016: $31,042 / $26,250 = 1.2
The Current Ratio is an indicator of how efficiently the Company manages it\'s operating cycle.
A higher Current Ratio implies that the COmpany is in a better position to discharge all it\'s short
term obligations without affecting or jeopardising it\'s working capital requirements. On the
flipside, a ratio that is too high indicates that the Company\'s current assets are lying idle or that
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lowest, the Company\'s Current Assets can pay off the Current Liabilities 1.2 times without
affecting working capital cycle for regular business needs.
Hence, as per the options given, we can say that CVS’s current ratio has decreased over the past
three years, however, it is greater than 1 indicating CVS is liquid.
c. Total Liabilities to Equity Ratio = Total Liabilities / Total Equity
For 2014: $36,224 / $37,963 = 0.95
For 2015: $55,234 / $37,203 = 1.5
For 2016: $57,628 / $36,834 = 1.6
Total Liabilities include all the claims, long term and short term, against the Company\'s
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funded by creditors versus how much is funded by the equity holders. Broadly, a 1:1 ratio is
considered acceptable for most industries. Creditors would prefer a lower ratio as this implies
their money is at less risk. However, equity holders would like to benefit from the risk taken by
them due to the Company using debt, and would prefer a higher ratio.
In the given case, this ratio is increasing year on year. This implies that the COmpany is taking
on more debt financing. This implies that the Company has more risk overall, although it
benefits the equity .
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It is extreme important for a firm to able to meet its obligation as.pdf
It is extreme important for a firm to able to meet its obligation as they become due. liquidity ratio
measures the ability of the firm to meet its current obligations(liabilities).A firm should ensure
that it does not suffer from lack of liquidity and also that it does not have excess liquidity. The
higher the ratio, the more liquid the company is. Low values indicate that a firm may have
difficulty meeting obligations.
All other things being equal, In general point of view a high liquid ratio to be better than a low
liquid ratio, because a high liquid ratio means that the company is more likely to meet its
liabilities which are due .
In general, low or decreasing ratios generally suggest that a company is over-leveraged,
struggling to maintain or grow sales, paying bills too quickly or collecting receivables too
slowly. On the other hand, a high or increasing ratio generally indicates that a company is
experiencing solid top-line growth, quickly converting receivables into cash, and easily able to
cover its financial obligations. Such companies often have faster inventory turnover and cash
conversion cycles.
Since the circumstances for every business and industry are different, making it difficult to create
a universal benchmark for healthy liquidity ratios. The best practice for investors, lenders and
managers is to consider liquidity ratios of successful competitors and historical trends.
In general terms the current ratio of 2 to 1 is considered satisfactory
and quick ratio of1 to 1 is considered to represent a satisfactory current financial condition. It is
possible to have higher values of current and quick ratio but the higher value of these ratio
indicates that that the business managers is unable to find investment opportunities .A higher
degree of liquidity is also bad as idle asset earns nothing, the firms fund will be unnecessary tied
up in current asset.
Solution
It is extreme important for a firm to able to meet its obligation as they become due. liquidity ratio
measures the ability of the firm to meet its current obligations(liabilities).A firm should ensure
that it does not suffer from lack of liquidity and also that it does not have excess liquidity. The
higher the ratio, the more liquid the company is. Low values indicate that a firm may have
difficulty meeting obligations.
All other things being equal, In general point of view a high liquid ratio to be better than a low
liquid ratio, because a high liquid ratio means that the company is more likely to meet its
liabilities which are due .
In general, low or decreasing ratios generally suggest that a company is over-leveraged,
struggling to maintain or grow sales, paying bills too quickly or collecting receivables too
slowly. On the other hand, a high or increasing ratio generally indicates that a company is
experiencing solid top-line growth, quickly converting receivables into cash, and easily able to
cover its financial obligations. Such companies often have faster invento.
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Liquidity ratios measure a company's ability to pay off short-term debt obligations by dividing cash and liquid assets by short-term borrowings and current liabilities. A ratio of over 1 means a company has sufficient liquid assets to meet short-term debt obligations, indicating good financial health. Higher liquidity ratios provide a greater margin of safety to cover current liabilities and mean the company is less likely to face financial difficulties. Debt ratios, on the other hand, assess a company's ability to handle long-term financial obligations by analyzing the proportion of total assets that were financed through debt. Generally, lower debt ratios are preferable, as they mean more assets were paid for without taking on debt.
Ratio formulas.pptx
This document discusses accounting ratios and their use in analyzing financial statements. It defines ratios as mathematical relationships between two or more numbers that can be expressed as fractions, proportions, percentages or numbers of times. The main types of ratios discussed are liquidity ratios, solvency ratios, activity ratios, and profitability ratios. Liquidity ratios like the current ratio and quick ratio assess a firm's ability to meet short-term obligations. Solvency ratios like the debt-equity ratio evaluate long-term financial stability. Activity ratios examine how efficiently a firm uses its resources. Profitability ratios measure financial performance and return. The document provides formulas and explanations for various key ratios and their significance in financial analysis.
Financial Statement Analysis Lecture1 1
This document discusses various types of financial ratios used in financial statement analysis, including:
1. Liquidity ratios like the current ratio and acid-test ratio, which measure a company's ability to pay short-term debts with its current assets.
2. Turnover ratios like inventory, debtors, and creditors turnover, which measure how efficiently a company utilizes its current assets.
3. Leverage ratios like the debt-to-equity ratio and interest coverage ratio, which indicate the degree of a company's financial leverage.
4. Profitability ratios like gross profit margin, which measure a company's ability to generate profits from sales.
5. Activity ratios, which measure how efficiently
What is solvency ratio.pdf
A performance indicator for assessing a company’s capacity to fulfil its long-term financial obligations is the solvency ratio. The solvency ratio is a key factor in determining a developer’s financial health and capacity to execute a project in real estate investments.
R C F,Prashant V V
The document provides an overview of ratio analysis, fund flow statements, and cash flow statements. It discusses various types of ratios like liquidity ratios, leverage ratios, and activity ratios. It explains key liquidity ratios like current ratio, quick ratio, and cash ratio. It also discusses leverage ratios like debt ratio and debt-equity ratio. The document then covers activity or turnover ratios and provides formulas for inventory turnover ratio and assets turnover ratio. It defines a fund flow statement and cash flow statement and discusses their purpose and limitations.
RATIO ANALYSIUS
This document provides an introduction to ratio analysis and outlines several key types of ratios used in financial statement analysis. It discusses liquidity ratios, which measure a company's ability to meet short-term debts, including the current ratio and acid test ratio. Profitability ratios are also covered, such as the gross profit ratio and operating ratio. Additional ratios mentioned include total debt to total assets, times interest earned, and various debt ratios. The purpose of ratio analysis is to evaluate a company's financial health and performance over time.
Ratio download
The document discusses various types of financial ratios used in ratio analysis. It defines ratios and explains their calculation and significance. The key ratios discussed are:
1. Liquidity ratios like current ratio and quick ratio, which measure a firm's ability to meet short-term obligations.
2. Leverage or capital structure ratios like debt-to-equity ratio and debt-to-total funds ratio, which assess long-term solvency.
3. Activity or turnover ratios like inventory turnover and debtors turnover, which evaluate efficiency of resource use.
4. Profitability ratios like gross profit ratio and return on equity, which examine profit generation.
The document provides formulas and interpretations
It is extreme important for a firm to able to meet its obligation as.pdf
It is extreme important for a firm to able to meet its obligation as they become due. liquidity ratio
measures the ability of the firm to meet its current obligations(liabilities).A firm should ensure
that it does not suffer from lack of liquidity and also that it does not have excess liquidity. The
higher the ratio, the more liquid the company is. Low values indicate that a firm may have
difficulty meeting obligations.
All other things being equal, In general point of view a high liquid ratio to be better than a low
liquid ratio, because a high liquid ratio means that the company is more likely to meet its
liabilities which are due .
In general, low or decreasing ratios generally suggest that a company is over-leveraged,
struggling to maintain or grow sales, paying bills too quickly or collecting receivables too
slowly. On the other hand, a high or increasing ratio generally indicates that a company is
experiencing solid top-line growth, quickly converting receivables into cash, and easily able to
cover its financial obligations. Such companies often have faster inventory turnover and cash
conversion cycles.
Since the circumstances for every business and industry are different, making it difficult to create
a universal benchmark for healthy liquidity ratios. The best practice for investors, lenders and
managers is to consider liquidity ratios of successful competitors and historical trends.
In general terms the current ratio of 2 to 1 is considered satisfactory
and quick ratio of1 to 1 is considered to represent a satisfactory current financial condition. It is
possible to have higher values of current and quick ratio but the higher value of these ratio
indicates that that the business managers is unable to find investment opportunities .A higher
degree of liquidity is also bad as idle asset earns nothing, the firms fund will be unnecessary tied
up in current asset.
Solution
It is extreme important for a firm to able to meet its obligation as they become due. liquidity ratio
measures the ability of the firm to meet its current obligations(liabilities).A firm should ensure
that it does not suffer from lack of liquidity and also that it does not have excess liquidity. The
higher the ratio, the more liquid the company is. Low values indicate that a firm may have
difficulty meeting obligations.
All other things being equal, In general point of view a high liquid ratio to be better than a low
liquid ratio, because a high liquid ratio means that the company is more likely to meet its
liabilities which are due .
In general, low or decreasing ratios generally suggest that a company is over-leveraged,
struggling to maintain or grow sales, paying bills too quickly or collecting receivables too
slowly. On the other hand, a high or increasing ratio generally indicates that a company is
experiencing solid top-line growth, quickly converting receivables into cash, and easily able to
cover its financial obligations. Such companies often have faster invento.
Ratio Analysis
The document discusses various types of financial ratios used to analyze companies. It describes liquidity ratios like current ratio and acid test ratio which measure a company's ability to meet short-term obligations. Leverage ratios like debt-equity ratio and debt-asset ratio assess the financial risk from a company's use of debt. Efficiency ratios examine how effectively a company uses its assets. Profitability ratios evaluate a company's net profit margins and returns on assets and equity.
TECHMAH BUS FIN.pptx
Tech Mahindra is an Indian IT services company with over 158,000 employees globally. The document analyzes Tech Mahindra's financial ratios for FY 2021-22. It finds that Tech Mahindra has good current, acid-test, and cash ratios, indicating strong liquidity. It also has low debt ratios and a favorable debt-to-equity ratio, suggesting manageable leverage. Additionally, Tech Mahindra has high returns on equity and acceptable earnings per share, demonstrating good profitability. Overall, the financial analysis presents Tech Mahindra as a company with strong liquidity and profitability metrics, making it a reasonable investment.
Imp ratios & there usage
The document discusses various types of ratios used to evaluate companies, including efficiency ratios, liquidity ratios, leverage ratios, and profitability ratios. Efficiency ratios measure how effectively a company uses its assets. Liquidity ratios evaluate a company's ability to meet short-term obligations. Leverage ratios assess how much debt a company has relative to equity. Profitability ratios provide information on a company's margins and returns. Comparing ratios over time and across peers can provide insights into a company's performance and financial health.
Financial analysis for juhayna & domty co . graduation project zagzig uni...
Financial Analysis is the process of selecting, evaluating, and identifying the financial
strength and weaknesses of the firm by properly establishing relationship between
items of financial statements. Firms, bank, loan officers and business owners all use
Financial analysis to learn more about a company’s current financial health as well as its
potential.
Ratios and leverages
This document discusses various financial ratios and leverages. It defines current ratio, quick ratio, gross profit ratio, and debt equity ratio as important financial ratios used to evaluate a company's performance and financial position. It also explains operating leverage, financial leverage, and combined leverage as ways companies use debt and fixed costs to potentially increase gains but also increase losses. Financial leverage is created through debt, operating leverage comes from fixed expenses, and combined leverage multiplies the effects of financial and operating leverage on earnings per share.
Ratio Analysis by Dr. Suresh vadde
Financial statement analysis involves various techniques to evaluate a company's financial health and performance, including ratio analysis. Ratio analysis calculates statistical relationships between financial data points to gain insights. Key ratios discussed in the document include liquidity ratios like the current ratio and quick ratio, leverage ratios like the debt-to-equity ratio, activity ratios like inventory turnover ratio, and profitability ratios. Calculating and analyzing ratios helps understand a company's liquidity, creditworthiness, operational efficiency, and profit generating ability.
Chap006
This document discusses key concepts around a company's financing decision of whether to issue debt or equity. It covers factors to consider like taxes, financial distress, signaling effects, and how financial leverage can increase expected returns but also amplify risk for shareholders. Examples and equations are provided to illustrate how different financing options like debt versus equity impact returns and financial ratios.
Formulae and Ratio Analysis
The document discusses various financial ratios used to analyze a company's profitability, liquidity, efficiency, gearing, and evaluate investments. It provides examples and definitions of key ratios including gross profit margin, net profit margin, current ratio, acid test (quick) ratio, return on capital employed, stock turnover, gearing ratio, and average rate of return.
Bm Unit 3.6 Ratio Analysis
IB Business and Management (Standard Level)
All material taken from the IB Business and Management Textbook:
"Business and Management", Paul Hoang, IBID Press, Victoria, 2007
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Financial analysis for juhayna & domty co . graduation project zagzig uni...
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- 1. Purpose: Understand the information provided by the current ratio and the debt ratio. Liquidity and Solvency Ratios measure the ability to meet financial obligations and the level of financial risk. The Current Ratio measures the ability to pay current payables as they come due by comparing current assets to current liabilities. It is a measure of short-term liquidity. A higher ratio indicates a stronger ability to pay current debts. The Debt Ratio measures the proportion of assets financed by debt by comparing total liabilities to total assets. It is a measure of long-term solvency. A higher ratio indicates greater financial risk. Use the chart above to answer the following questions. Stock symbols are shown in parentheses. Q1 Of the above three restaurant chains, which is your favorite? (DIN / DRI / NATH) - DIN operates Applebee's Neighborhood Grill & Bar and IHOP. - DRI operates Red Lobster, Olive Garden, Bahama Breeze, and Smokey Bones Barbeque and Grill. - NATH operates Nathan's Famous. Q2 (DIN / DRI / NATH) have sufficient current assets to pay off current liabilities and, therefore, have a current ratio (greater / less) than 1.0. A current ratio that is (lower / higher) than the industry average may indicate a lack of short-term liquidity, which includes (DIN / DRI / NATH). Does this indicate that this corporation is insolvent or unable to pay its bills? (Yes / No) Explain. Q3 (DIN / DRI / NATH) are relying more on debt to finance assets and have a debt ratio (greater / less) than 50%. Darden Restaurants is financing % of assets with debt. For a company wanting to be lower risk and less dependent on debt, a (n) (increasing / decreasing) trend in the debt ratio is considered favorable. A company that has higher financial risk will, in general, be required to pay (higher / lower) interest rates when borrowing money. Q4 Why does a company with a higher debt ratio tend to have greater financial risk? Q5 Does a high debt ratio indicate a weak corporation? (Yes / No) Explain your answer. - Instead of reporting the Debr Ratia, some finoncial saarces nepert the Debt-ta-Equity rutia, computed as liabilinies divided by