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# Liquidity ratios

Use this information to calculate the ratios below. Cash \$ 900 Accounts receivable 1,200 Inventory 2,100 Accounts payable 1,600 Average daily operating costs 70 Total assets 8,600

Current ratio = __________ Cash ratio = __________ Quick ratio = __________ Interval measure = __________ Net working capital to total assets = __________

Liquidity ratios
Current ratio
Cash Accounts receivable Inventory Current assets Accounts payable Current liabilities 2,100 \$4,200 1,600 \$1,600 \$ 900 1,200

Quick ratio

Cash ratio

## Cash Current liabilitie s \$900 \$1,600 0.5625

Liquidity ratios
Cash Accounts receivable Inventory Accounts payable Average daily operating costs Total assets \$ 900 \$1,200 \$2,100 \$1,600 \$ 70 \$8,600

Intervalmeasure

## Net working capital to total assets

Net working capital Total assets Current assets - currentliabilitie s Total assets \$4,200 \$1,600 \$8,600 .3023 (rounded ) 30.23%

Liquidity ratios
Current assets Current liabilitie s

Cash \$100 Accounts receivable 100 Inventory 100 Total current assets Accounts payable \$150 Total current liabilities

Current ratio

\$300 \$150

Current ratio

## \$300 2.0 \$150

Now assume you pay \$50 on your accounts payable. You now have this situation.
Cash \$ 50 Accounts receivable 100 Inventory 100 Total current assets Accounts payable \$100 Total current liabilities

\$250 \$100

## \$250 Current ratio 2.5 \$100

Liquidity ratios
Indicate for each action whether the current ratio, the quick ratio and the cash ratio will increase (I), decrease (D) or not change (NC). Assume net working capital is positive.
Current ______ ______ ______ ______ ______ Quick ______ ______ ______ ______ ______ Cash _____ _____ _____ _____ _____

1. Short-term debt is paid 2. Long-term debt is paid 3. Inventory is sold on credit at a profit 4. Inventory is sold for cash at cost 5. A customer pays their bill 6. Inventory is purchased on accounts payable 7. Inventory is purchased for cash 8. Cash is received from long-term loan

______
______

______
______

_____
_____

Liquidity ratios

Current 1. Short-term debt is paid I 2. Long-term debt is paid D 3. Inventory is sold on credit at a profit I 4. Inventory is sold for cash at cost NC 5. A customer pays their bill NC 6. Inventory is purchased on accounts payable D 7. Inventory is purchased for cash NC 8. Cash is received from long-term loan I

Quick I D I I NC D D I

Cash I D NC I I D D I

## Long-term solvency ratios

Your firm has total assets of \$146,000 and a total debt ratio of 40%.

## Long-term solvency ratios

Your firm has total assets of \$146,000 and a total debt ratio of 40%. What is the firms debt-equity ratio?
Total debt ratio Total assets - Total equity Total assets Total debt Total assets Total debt .40 \$146,000 Total debt \$58,400

Step 1: Find total debt Step 2: Find total equity Step 3: Find debt-equity ratio

## Long-term solvency ratios

Your firm has earnings before interest and taxes of \$27,931. The times interest earned ratio is 5.3 and the cash coverage ratio is 8.6.

What is the amount of the interest paid expense? What is the amount of the depreciation expense?

## Long-term solvency ratios

Your firm has earnings before interest and taxes of \$27,931. The times interest earned ratio is 5.3 and the cash coverage ratio is 8.6.
Times interest earned ratio EBIT Interest \$27,931 5.3 Interest 5.3 Interest \$27,931 Interest \$5,270
EBIT depreciation Interest \$27,931 Depreciation 8 .6 \$5,270 \$45,322 \$27,931 Depreciation

Step 1: Find the interest expense using the times interest earned ratio

## Cash coverage ratio

Step 2: Find the depreciation expense using the cash coverage ratio

Depreciation \$17,391

## Asset utilization ratios

Your firm has sales of \$927,450, accounts receivables of \$34,350, inventory of \$48,600 and costs of goods sold of \$648,810. What is the inventory turnover rate? How many days does it take to sell inventory? What is the accounts receivable turnover rate? How many days does it take to collect payment from a customer? Round your answers to two decimal places.

## Asset utilization ratios

Your firm has sales of \$927,450, accounts receivables of \$34,350, inventory of \$48,600 and costs of goods sold of \$648,810.

Inventoryturnover

## Cost of goods sold Inventory \$648,810 \$48,600 13.35

Receivable s turnover

## Asset utilization ratios

Your firm has current liabilities of \$21,800, total assets of \$82,900 and sales of \$149,200. The net working capital is \$4,600.

1. What is the total asset turnover rate? 2. What is the NWC turnover rate? 3. What is the fixed asset turnover rate?

## Asset utilization ratios

Your firm has current liabilities of \$21,800, total assets of \$82,900 and sales of \$149,200. The net working capital is \$4,600.
Sales Total asset turnover Total assets \$149 ,200 \$82 ,900 1.80
Net working capital Current assets - current liabilities \$4,600 Current assets - \$21,800 Current assets \$26,400

NWC turnover

## Sales Net fixed assets \$149,200 \$56,500 2.64

Profitability ratios
Your firm has net income of \$123,000 on sales of \$2.4 million. Total assets are \$2.46 million and total equity is \$1.5 million.

What is the profit margin (return on sales)? What is the return on assets? What is the return on equity?

Profitability ratios
Your firm has net income of \$123,000 on sales of \$2.4 million. Total assets are \$2.46 million and total equity is \$1.5 million.
Profit margin Net income Sales \$123,000 \$2,400,000 .05125 5.125%

Net income Return on equity Total equity \$123,000 \$1,500,000 .082 8.2%

Return on assets

## Net income Total assets \$123,000 \$2,460,000 .05 5%

Profitability ratios
Your firm has net income of \$368,400, total assets of \$23.946 million and an equity multiplier of 1.6.

## What is the return on equity?

Profitability ratios
Your firm has net income of \$368,400, total assets of \$23.946 million and an equity multiplier of 1.6. What is the return on equity?
Total assets Equity multiplier Total equity \$23,946,000 1 .6 Total equity 1.6 Total equity \$23,946,000 Total equity \$14,966,250

Step 1: Find total equity (TE) Step 2: Find return on equity (ROE)

Net income Return on equity Total equity \$368,400 Return on equity \$14,966,250 Return on equity .024615385 2.46%

Profitability ratios
Your firm has sales of \$324,000 and total assets of \$216,000. The debt-equity ratio is .5 and the profit margin is 5.4%.

What are the values of the three parts of the DuPont formula? What is the ROE?

Profitability ratios
Your firm has sales of \$324,000 and total assets of \$216,000. The debt-equity ratio is .5 and the profit margin is 5.4%. What are the values of the three parts of the DuPont formula? What is the ROE?

ROE PM TAT EM PM Sales Total assets Total assets Total equity \$216 , 000 \$144 , 000

## Debt - equity ratio

Total debt Total equity Total debt .5 Total equity .5 Total equity Total debt

.054

## .054 1.5 1.5 .1215 12.15%

Total assets Total debt Total equity \$216,000 .5 Total equity Total equity \$216,000 1.5 Total equity \$144,000 Total equity

Profitability ratios
Your firm has sales of \$12,600, total assets of \$8,100, and a debtequity ratio of .80. The return on equity is 14%. What is the net income?

Profitability ratios
Your firm has sales of \$12,600, total assets of \$8,100, and a debt-equity ratio of .80. The return on equity is 14%.

## What is the net income?

Total assets - total equity Total equity \$8,100 Total equity .8 Total equity .8 Total equity \$8,100 - Total equity 1.8 Total equity \$8,100 Total equity \$4,500

Net income Total equity Net income .14 \$4,500 \$630 Net income ROE

## Market value ratios

A firm has net income of \$638,000 and total equity of \$3.828 million. There are 200,000 shares of common stock outstanding. Each share is currently selling for \$76.56.

## Market value ratios

A firm has net income of \$638,000 and total equity of \$3.828 million. There are 200,000 shares of common stock outstanding. Each share is currently selling for \$76.56.
P/E Price per share Earnings per share \$76.56 \$3.19 24

Market - to - book

EPS

## Net income Number of shares \$638,000 200,000 \$3.19

Market value per share Book value per share Market value per share Total equity Number of shares \$76.56 \$3,828,000 200,000 \$76.56 \$19.14 4