Financial Statements Analysis: Analysis

Solvency (1) - Quick Ratio

Measures the extent to which a business can cover its current liabilities with those current assets readily convertible to cash.
Shows number of dollars of liquid assets available to cover each dollar of current debt.
Any time the ratio is 1:1 (1.0), the business is said to be in a liquid condition.
The larger the ratio, the greater the liquidity.

Solvency (2) - Current Ratio

Measures the degree to which current assets cover current liabilities.
The higher the ratio, the more likely the company will be able to meet its liabilities.
A ratio of 2 to 1 (2.0) or higher is desirable.

Solvency (3) - Current Liabilities to Net Worth Ratio

Indicates the amount due creditors within a year as a percentage of the owners' or stockholders' investment.
Measures the funds creditors are risking with a business temporarily against the funds permanently invested by its owners.
Normally a business starts to have trouble when this relationship exceeds 80%.

Solvency (4) - Total Liabilities to Net Worth Ratio

Shows how all of the company’s debt relates to the equity of the owner or stockholders.
The higher this ratio, the less protection there is for creditors.
If total liabilities exceed net worth then creditors have more at stake than stockbrokers.
The difference between this ratio and Current Liabilities to Net Worth Ratio is that it pinpoints the relative size of long-term debt, which can burden a firm with substantial interest charges.

Solvency (5) - Fixed Assets to Net Worth Ratio

Shows the percentage of assets centered in fixed assets compared to total equity.
Generally the higher this percentage is over 75%, the more vulnerable a concern becomes to unexpected hazards and business climate changes.
Capital is frozen in the form of machinery and the margin for operating funds becomes too narrow to support day-to-day operations.

Efficiency (1) - Collection Period Ratio

Helpful in analyzing the collectibility of accounts receivable, or how fast a business can increase its cash supply.

Efficiency (2) - Net Sales to Inventory Ratio

Measures how fast inventory is moving the cash flow into the business.
When this ratio is high, it may indicate a situation where sales are being lost because a concern is understocked and/or customers are buying elsewhere.
If the ratio is too low, this may show that inventories are obsolete or stagnant.

Efficiency (3) - Assets to Net Sales Ratio

Rates sales to the total investment that is used to generate those sales.
If percentage is abnormally high, it indicates that a business is not being aggressive enough in its sales efforts, or that its assets are not being fully utilized.
A low ratio may indicate a business is selling more than can be safely covered by its assets.

Efficiency (4) - Assets to Net Working Capital

Measures the number of times working capital turns over annually in relation to net sales.
Should be viewed in conjunction with the assets to sales ratio.
A high turnover rate can indicate overtrading (excessive sales volume in relation to the investment in the business).
A high turnover may indicate that the business relies extensively upon credit granted by suppliers or the bank as a substitute for an adequate margin of operating funds.

Efficiency (5) - Payable to Net Sales Ratio

Measures how the company pays its suppliers in relation to the sales volume being transacted.
A low percentage would indicate a healthy ratio. A high percentage indicates the firm may be using suppliers to help finance operations.

Profitability (1) - Return on Sales, or Profit Margin

Measures profits after taxes on the year’s sales (profits earned per dollar of sales).
The higher this ratio, the better prepared the business to handle downtrends brought on by adverse conditions.