1-36
FINANCIAL STATEMENT ANALYSIS
Quick (Acid-Test) Ratio
Coverage of current
liabilities by most
liquid current assets
The Quick (Acid-Test) Ratio is computed by subtracting
I
NVENTORIES
from
C
URRENT
A
SSETS
, then dividing the remainder by
C
URRENT
L
IABILITIES
. XYZ Corporation's Quick Ratio can be calculated as
follows:
Quick Ratio
=
(Current Assets - Inventories) / (Current Liabilities)
=
($153.0 - $88.7) / ($61.4)
=
1.05 times
Inventories usually are the least liquid of the current assets. They are
the most difficult to convert to cash and most likely to incur losses
in the course of a liquidation. The Quick Ratio gives an indication of
the firm's ability to meet short-term obligations without relying on the
sale of inventories. XYZ Corporation can use its most liquid current
assets to pay off the current liabilities 1.05 times.
Asset Management Ratios
Assess
appropriateness
of amounts in
asset accounts
These ratios attempt to measure how effectively the company is
managing its assets. They are designed to tell the analyst if the
amounts of each type of asset reported on the Balance Sheet are
reasonable, given current and anticipated operating levels of the firm.
Asset Management Ratios include:
·
Inventory Turnover Ratio
·
Average Collection Period
·
Fixed Assets Turnover Ratio
·
Total Assets Turnover Ratio
Inventory Turnover Ratio
The Inventory Turnover (Inventory Utilization) Ratio is calculated
by dividing the Net
S
ALES
of the firm by its
I
NVENTORIES
.
Inventory Turnover
=
(Net Sales) / (Inventories)
=
($287.6) / ($88.7)
=
3.24 times