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Financial Ratios (Types of Financial Ratios (Profitability Ratios (Higher…

- - - - Average amount of time needed to collect the Accounts Receivable
      - Too long = Weak credit collection/management
      - Important to manage to remove poor quality debtors
    - - Average amount of time needed to pay the accounts payable
      - Longer APP may make creditors unhappy and stop supplying goods
    - - Average amount of time needed to sell the inventory
      - Too long = Slow moving stocks = Obsolete goods, cash tied up in inventory
      - High = Superior products, attractive credit terms
  - - - Measures the relationship between long term debt financing and financing from the firm's owners
      - Low = Does not rely too much on long-term debt/external long term sources of financing
    - - Firm's ability to make interest payments out of its operating profit
    - - Proportion of total assets financed by debt sources (total liabilities)
      - Whether the firm over reliant on external sources of financing
  - - - Exclude inventory as it is the least liquid asset
      - Every $1 of current liabilities is covered by $X of the firm's CA
    - - Not a ratio, but an absolute figure
      - Useful for time-series analysis
    - - Measure a firm's ability to meet short-term obligations
      - Every $1 of current liabilities is covered by $X of the firm's CA
  - - - Percentage of net profit earned per sales dollar (after interest and taxes)
      - Higher = Profitable in its trading, operating, and financing activities)
    - - Dollars earned per ordinary shares issued and outstanding
      - Higher = More Successful, but not too high
    - - Percentage of operating profit earned per sales dollar (before interest and taxes)
      - Higher = Profitable in its trading and operating activities
    - - Number of times investors were paying for each dollar of the firm's earnings
      - Investors' degree of confidence
    - - Percentage of gross profit earned per sales dollar
      - Higher = Profitable in its trading operations
      - Low = Competition, shortage of materials