A. Current
Ratio – is an indication of the business’ ability to
fund current liabilities with current assets. The ratio is defined
as:
Current
Assets
Current Liabilities
The higher the ratio,
the greater the business’ ability to fund current liabilities
with current assets.
B. Quick
Ratio – is an indication of the business’ ability to
fund current liabilities with the most liquid current assets.
The ratio is defined as:
Cash &
Equivalents + Net Trade Receivables
Current
Liabilities
If the ratio is
substantially less than current ratio, then the business has a
dependency on non-liquid current assets, such as inventory, to
fund current liabilities.
C. Days
Accounts Receivable – provides an estimate of how long
it takes the business to convert a sale to cash. Normally, this
ratio is also cross-referenced with an Aging of Accounts Receivable.
This ratio is defined as:
365 x Net Trade
Receivables
Net
Sales
The lower the number,
the fewer days it takes to convert a sale into cash.
D. Days
Payable – provides an estimate of how long it takes the
business to pay its trade creditors. Normally, this ratio is also
cross-referenced with an Aging of Accounts Payable and the Dun
and Bradstreet Report. This ratio is defined as:
365 x Trade
Payables
Cost of Sales
The lower the number,
the fewer days it takes the business to pay its trade creditors.
E. Inventory
Turnover – provides an estimate of how many times inventory
is turned over by a business during a typical operating cycle.
The ratio is defined as:
Cost of Sales
Inventory
The higher the number,
the greater the number of times inventory is turned over by a
business.
F. Days
Inventory Turnover – provides an estimate of how long
inventory is held by the business before it is sold. The ratio
is defined as:
365 x Inventory
Cost of Sales
The lower the number,
the fewer days it takes the business to sell its inventory.
