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Ratios

# Ratios

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05/04/2015

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Receivables Turnover Ratio
What Does
Receivables Turnover Ratio
Mean?
An accounting measure used to quantify a firm's effectiveness in extending credit as well ascollecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently afirm uses its assets.Formula:Some companies' reports will only show sales - this can affect the ratio depending on the size of cash sales.
I
nvestopedia explains
Receivables Turnover Ratio
By maintaining accounts receivable, firms are indirectly extending interest-free loans to their clients. A high ratio implies either that a company operates on a cash basis or that its extensionof credit and collection of accounts receivable is efficient.A low ratio implies the company should re-assess its credit policies in order to ensure the timelycollection of imparted credit that is not earning interest for the firm.
I
nventory Turnover
What Does
I
nventory Turnover
Mean?
A ratio showing how many times a company's inventory is sold and replaced over a period. theThe days in the period can then be divided by the inventory turnover formula to calculate thedays it takes to sell the inventory on hand or "inventory turnover days".

I
nvestopedia explains
I
nventory Turnover
Although the first calculation is more frequently used, COGS (cost of goods sold) may besubstituted because sales are recorded at market value, while inventories are usually recorded atcost. Also, average inventory may be used instead of the ending inventory level to minimizeseasonal factors.This ratio should be compared against industry averages. A low turnover implies poor sales and,therefore, excess inventory. A high ratio implies either strong sales or ineffective buying.High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall.
A
ctivity Ratio
What Does
A
ctivity Ratio
Mean?
Accounting ratios that measure a firm's ability to convert different accounts within their balancesheets into cash or sales.
I
nvestopedia explains
A
ctivity Ratio
Companies will typically try to turn their production into cash or sales as fast as possible becausethis will generally lead to higher revenues.Such ratios are frequently used when performing fundamental analysis on different companies.The asset turnover ratio and inventory turnover ratio are good examples of activity ratios.
Q
uick Ratio
What Does
Q
uick Ratio
Mean?
An indicator of a company's short-term liquidity. The quick ratio measures a company's ability tomeet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company.The quick ratio is calculated as:

Also known as the "acid-test ratio" or the "quick assets ratio".
I
nvestopedia explains
Q
uick Ratio
The quick ratio is more conservative than the current ratio, a more well-known liquidity measure, because it excludes inventory from current assets. Inventory is excluded because somecompanies have difficulty turning their inventory into cash. In the event that short-termobligations need to be paid off immediately, there are situations in which the current ratio wouldoverestimate a company's short-term financial strength.
C
urrent Ratio
What Does
urrent Ratio
Mean?
A liquidity ratio that measures a company's ability to pay short-term obligations.The Current Ratio formula is:Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".
I
nvestopedia explains
urrent Ratio
The ratio is mainly used to give an idea of the company's ability to pay back its short-termliabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily meanthat it will go bankrupt - as there are many ways to access financing - but it is definitely not agood sign.The current ratio can give a sense of the efficiency of a company's operating cycle or its ability toturn its product into cash. Companies that have trouble getting paid on their receivables or havelong inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. Because business operations differ in each industry, it is always more