Better The Liquidity Current Ratio This Ratio example essay topic

Reebok financial analysis paper by Solvency ratios Quick ratio The quick ratio is a vital financial ratio that provides managers with the number of dollars of liquid assets on hand to cover each dollar of existing debt. It is important in determining solvency. The ratio reveals the safety afforded short term creditors in cash or near cash assets. It shows the number of dollars of liquid assets on hand to cover each dollar of current debt.

Any time this ratio is as much as 1 to 1, (1.0) the business is said to be in liquid condition. The larger the ratio, the better the liquidity Current ratio This ratio measures the degree to which current assets cover current liabilities. The higher the ratio the more assurance exists that the sequestration of current liabilities can be made. The current ratio measures the margin of safety available to cover any possible shrinkage in the value of current assets.

By and large, a ratio of 2: 1 is good Current liabilities to net worth This compares the funds that creditors provisionally are risking with the funds permanently invested by the owners. The lesser the net worth, and the larger the liabilities means less security for the creditors. Be careful when selling any firm with current liabilities greater than 66.6% (or ) versus net worth. Current liabilities to inventory This ratio combines with net sales to inventory to indicate how management controls inventory.

According to D&B, large increases in sales with resultant increases in inventory levels can cause an unsuitable rise in current liabilities if growth isn't managed prudently. Total liabilities versus net worth The effect of long term obligations on a business can be computed by comparing this proportion of current liabilities to net worth. The difference will focus on the relative size of long term debt, which can encumber a firm with significant interest charges. This shouldn't exceed net worth at all, because then creditors would have a greater stake than the firms owners would. Fixed assets to net worth A low ratio is preferred, with a high ratio being adverse, because with heavy investment in fixed assets indicates a low net working capital and is overtrading or has utilized large funded debt to harmonize working capital. Normally fixed assets above 75% of net worth indicate likely over investment, and should be checked.

Efficiency ratios Collection period The quality of the receivables of a company can be figured by this relationship when compared with selling terms, and norms in the industry. According to D&B, normally where most sales are for credit, the proportion of cash sales should not exceed more than 1/3 over normal selling terms. This could be indicative of some slow moving receivables. Sales to inventory Inventory control is a principal management aim, since poor controls sanction inventory to become costly to store, become archaic, or unproductive to meet demands. This ratio is an marker to the speed at which supplies are being moved, and the effect on the movement of funds into the business, and this ratio varies widely between lines of business and a companies figure is only really accurate when compared to industry norms. Assets to sales This is used to bind sales and the total investment that is used to make those sales.

Usually by comparing a company's ratio with its industry norms, in can be evaluated weather a firm is over trading or under trading. Unusually low ratios (above the upper quartile) can be indicative of overtrading, which can cause financial problems, if not corrected. Very high ratios (below the lower quartile) can be the result of excessively conservative, or poor sales management meaning a more aggressive sales strategy may need to be utilized. Sales to net working capital. This ratio is indicative of weather a company is overtrading, or if it's carrying more liquid assets than needed for its volume. Companies with extensive sales gains will reach a level where their operational capital becomes stressed even if they maintain an adequate total investment for the volume being generated such that the investment may be so mired in fixed assets or other non current items, that it will be risky to continue to meet existing responsibilities without supplementary investment or dropping sales.

Account payables to sales This measures how the company is paying its suppliers in relation to quantity being transacted. A growing ratio or one larger than the industry average may be indicative that the firm may be using suppliers to help fund operations. This ratio is critical to short term creditors because a high percentage could be a sign of potential problems in paying vendors. Profitability ratios Return on sales or profit margin These shows the profits earned per dollar of sales and consequently measure the efficiency of the enterprise. A return must be adequate for the firm to attain acceptable proceeds for its owners. This is indicative of the firm's ability to withstand unfavorable conditions like falling prices, rising costs or declining sales.

Return on assets This is the key indicator of profitability. It matches operating profits with the assets available to earn a return. Enterprises efficiently using their assets will have a relatively high return, while poorly run businesses will be low. Return on equity or return on net worth This formula is used to scrutinize the ability of management to recognize an adequate return on the capital invested by the owners. As a rule, a correlation of at least 10% is regarded as a desirable goal for providing dividends plus resources for continued growth. Reebok better or worse by year Reebok Industry better or worse by industry 2000 2001 2000 2000 Solvency Quick Ratio 1.1 1.8 better 1.1 1.0 better Current Ratio 2.5 2.9 better 2.5 2.3 better current liabilities to net worth 80.4% 62.4% better 80.4% 72.6% worse current liabilities to inventory 124.0% 123.8% better 124.0% 128.7% better total liabilities to net worth 80.3% 62.4% better 80.3% 77.5% worse fixed assets to net worth 14.7% 13.8% better 14.7% 12.0% worse Efficiency collection period 34.2 46.8 worse 34.2 52.0 better sales to inventory 7.3 8.2 better 7.3 7.3 better Assets to Sales 51.1% 51.6% worse 51.1% 45.3% worse sales to net working capital 3.9 3.5 worse 3.9 5.6 worse Acct Pay To Sales 6.0% 4.3% better 6.0% 4.8% worse Profitability Return On Sales 2.8% 3.4% better 2.8% 1.8% better Return On Assets 5.5% 6.7% better 5.5% 6.2% worse return on net worth 13.3% 14.3% better 13.3% 23.9% worse reebok better or worse by year reebok Industry better or worse by industry 2000 2001 2000 2000 Solvency Quick Ratio 1.1 1.8 better 1.1 1.0 better Current Ratio 2.5 2.9 better 2.5 2.3 better current liabilities to net worth 80.4% 62.4% better 80.4% 72.6% worse current liabilities to inventory 124.0% 123.8% better 124.0% 128.7% better total liabilities to net worth 80.3% 62.4% better 80.3% 77.5% worse fixed assets to net worth 14.7% 13.8% better 14.7% 12.0% worse Efficiency collection period 34.2 46.8 worse 34.2 52.0 better sales to inventory 7.3 8.2 better 7.3 7.3 better Assets to Sales 51.1% 51.6% worse 51.1% 45.3% worse sales to net working capital 3.9 3.5 worse 3.9 5.6 worse Acct Pay To Sales 6.0% 4.3% better 6.0% 4.8% worse Profitability Return On Sales 2.8% 3.4% better 2.8% 1.8% better Return On Assets 5.5% 6.7% better 5.5% 6.2% worse return on net worth 13.3% 14.3% better 13.3% 23.9% worse.