Similarities and Difference Bluenile.Com, Diamond.Com and Jewerlyexchange
CHAPTER 3
WORKING WITH FINANCIAL STATEMENTS
Financial statement information is often our ONLY source of information. Consequently, we use the information we have and make adjustments where appropriate.
1. Ratio Analysis
♦ Short-Term Solvency or Liquidity Ratios – Measures the ability of the firm to meet its current (short-term, < 1 year) obligations.
• Liquidity is defined as the ability to convert assets to cash quickly without a significant loss in value • Liquidity vs. Profitability trade-off
Current ratio = current assets / current liabilities
Quick ratio = (current assets – inventory) / current liabilities
• Also referred to as the “acid-test” ratio.
Cash ratio = cash / current liabilities ♦ Long-Term Solvency Ratios - This group of ratios really measures two different aspects of leverage – the level of indebtedness and the ability to service debt. The former is indicative of the firm’s debt capacity, while the latter more closely relates to the likelihood of default. The total debt ratio measures what proportion of the firm’s assets are financed with borrowed money, while the debt/equity ratio compares the amount of funds supplied by creditors relative to owners.
Total debt ratio = (total assets – total equity) / total assets = total debt / total assets
Debt-equity ratio = (total assets – total equity) / total equity = total debt / total equity
Equity multiplier = total assets / total equity = (total equity + total debt) / total equity = 1 + debt-equity ratio
Times interest earned ratio = EBIT / Interest
Cash coverage ratio = (EBIT + depreciation) / interest
♦ Asset Management or Turnover Ratios – Measures how effectively the firm is managing its assets; also called asset utilization ratios.
Inventory turnover = cost of goods sold / inventory
• It is usually more accurate to use
WORKING WITH FINANCIAL STATEMENTS
Financial statement information is often our ONLY source of information. Consequently, we use the information we have and make adjustments where appropriate.
1. Ratio Analysis
♦ Short-Term Solvency or Liquidity Ratios – Measures the ability of the firm to meet its current (short-term, < 1 year) obligations.
• Liquidity is defined as the ability to convert assets to cash quickly without a significant loss in value • Liquidity vs. Profitability trade-off
Current ratio = current assets / current liabilities
Quick ratio = (current assets – inventory) / current liabilities
• Also referred to as the “acid-test” ratio.
Cash ratio = cash / current liabilities ♦ Long-Term Solvency Ratios - This group of ratios really measures two different aspects of leverage – the level of indebtedness and the ability to service debt. The former is indicative of the firm’s debt capacity, while the latter more closely relates to the likelihood of default. The total debt ratio measures what proportion of the firm’s assets are financed with borrowed money, while the debt/equity ratio compares the amount of funds supplied by creditors relative to owners.
Total debt ratio = (total assets – total equity) / total assets = total debt / total assets
Debt-equity ratio = (total assets – total equity) / total equity = total debt / total equity
Equity multiplier = total assets / total equity = (total equity + total debt) / total equity = 1 + debt-equity ratio
Times interest earned ratio = EBIT / Interest
Cash coverage ratio = (EBIT + depreciation) / interest
♦ Asset Management or Turnover Ratios – Measures how effectively the firm is managing its assets; also called asset utilization ratios.
Inventory turnover = cost of goods sold / inventory
• It is usually more accurate to use