Financial Ratios  Internal Liquidity Ratios
1. Current Ratio
This ratio is a measure of the ability of a firm to meet its shortterm obligations. In general, a ratio of 2 to 3 is usually considered good. Too small a ratio indicates that there is some potential difficulty in covering obligations. A high ratio may indicate that the firm has too many assets tied up in current assets and is not making efficient use to them.
Formula 7.3
Current ratio = current assets current liabilities 
2. Quick Ratio
The quick (or acidtest) ratio is a more stringent measure of liquidity. Only liquid assets are taken into account. Inventory and other assets are excluded, as they may be difficult to dispose of.
Formula 7.4
Quick ratio = (cash+ marketable securities + accounts receivables) current liabilities 
3. Cash Ratio
The cash ratio reveals how must cash and marketable securities the company has on hand to pay off its current obligations.
Formula 7.5
Cash ratio = (cash + marketable securities) current liabilities 
4. Cash Flow from Operations Ratio
Poor receivables or inventoryturnover limits can dilute the information provided by the current and quick ratios. This ratio provides a better indicator of a company's ability to pay its shortterm liabilities with the cash it produces from current operations.
Formula 7.6
Cash flow from operations ratio = cash flow from operations current liability 
5. Receivable Turnover Ratio
This ratio provides an indicator of the effectiveness of a company's credit policy. The high receivable turnover will indicate that the company collects its dues from its customers quickly. If this ratio is too high compared to the industry, this may indicate that the company does not offer its clients a long enough credit facility, and as a result may be losing sales. A decreasing receivableturnover ratio may indicate that the company is having difficulties collecting cash from customers, and may be a sign that sales are perhaps overstated.
Formula 7.7
Receivable turnover = net annual sales average receivables
Where: 
6. Average Number of Days Receivables Outstanding (Average Collection Period)
This ratio provides the same information as receivable turnover except that it indicates it as number of days.
Formula 7.8
Average number of days receivables outstanding = 365 days_ receivables turnover 
7. Inventory Turnover Ratio
This ratio provides an indication of how efficiently the company's inventory is utilized by management. A high inventory ratio is an indicator that the company sells its inventory rapidly and that the inventory does not languish, which may mean there is less risk that the inventory reported has decreased in value. Too high a ratio could indicate a level of inventory that is too low, perhaps resulting in frequent shortages of stock and the potential of losing customers. It could also indicate inadequate production levels for meeting customer demand.
Formula 7.9
Inventory turnover = cost of goods sold average inventory
Where: 
8. Average Number of Days in Stock
This ratio provides the same information as inventory turnover except that it indicates it as number of days.
Formula 7.10
Average number of days in stock = 365 inventory turnover 
9. Payable Turnover Ratio
This ratio will indicate how much credit the company uses from its suppliers. Note that this ratio is very useful in credit checks of firms applying for credit. Payable turnover that is too small may negatively affect a company's credit rating.
Formula 7.11
Payable turnover = Annual purchases Average payables
Where: 
10. Average Number of Days Payables Outstanding (Average Age of Payables)
This ratio provides the same information as payable turnover except that it indicates it by number of days.
Formula 7.12
Average number of days payables outstanding = 365_____ payable turnover 
II. Other InternalLiquidity Ratios
11. Cash Conversion Cycle
This ratio will indicate how much time it takes for the company to convert collection or their investment into cash. A high conversion cycle indicates that the company has a large amount of money invested in sales in process.
Formula 7.13
Cash conversion cycle = average collection period + average number of days in stock  average age of payables 
Cash conversion cycle = average collection period + average number of days in stock  average age of payables
12. Defensive Interval
This measure is essentially a worstcase scenario that estimates how many days the company has to maintain its current operations without any additional sales.
Formula 7.14
Defensive interval = 365 * (cash + marketable securities + accounts receivable) projected expenditures
Where: 

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