Download these three files (Ratios definitions.doc; Financial Statement Analysis v2017.doc; and QUES Buckle financial statements for 2013-2017.xls). Complete the files then return by the due date. The

OBJECTIVE 5: Apply ratio analysis to financial statements in a comprehensive evaluation of a company’s financial performance.

Summary Statement

The ratios used in ratio analysis provide information about a company’s liquidity, profitability, long-term solvency, cash flow adequacy, and market strength. The most common ratios are listed below.

Table of Ratios

Ratio Components Use or Meaning

Liquidity Ratios

Current ratio Current Assets Measure of short-term

Current Liabilities debt-paying ability

Quick ratio Cash + Marketable Measure of short-term Securities + Receivables debt-paying ability

Current Liabilities

Receivable turnover Net Sales Measure of relative size of

Average Accounts accounts receivable and Receivable effectiveness of credit policies

Average days’ sales Days in Year Measure of average days

uncollected Receivable Turnover taken to collect receivables

Inventory turnover Cost of Goods Sold Measure of relative size

Average Inventory of inventory

Average days’ Days in Year Measure of average days

inventory on hand Inventory Turnover taken to sell inventory

Payables turnover Cost of Goods Sold +/– Measure of relative size

Change in Inventory of accounts payable

Average Accounts Payable

Average days’ payable Days in Year Measure of average days

Payables Turnover taken to pay accounts payable

(Note: The term operating cycle means the time it takes to sell products and collect for them.
It equals average days’ inventory on hand plus average days’ sales uncollected.)

Ratio Components Use or Meaning

Profitability Ratios

Profit margin Net Income Measure of net income pro-

Net Sales duced by each dollar of sales

Asset turnover Net Sales Measure of how efficiently

Average Total Assets assets are used to produce sales

Return on assets Net Income Measure of overall earning

Average Total Assets power, or profitability

Return on equity Net Income Measure of the profitability of

Average Stockholders’ Equity stockholders’ investments

Long-Term Solvency Ratios

Debt to equity ratio Total Liabilities Measure of capital structure

Stockholders’ Equity and leverage

Interest coverage ratio Income Before Income Measure of creditors’
Taxes + Interest Expense protection from default
Interest Expense on interest payments

Cash Flow Adequacy Ratios

Cash flow yield Net Cash Flows from Measure of the ability to Operating Activities generate operating cash flows

Net Income in relation to net income

Cash flows to sales Net Cash Flows from Measure of the ability of Operating Activities sales to generate operating

Net Sales cash flows

Cash flows to assets Net Cash Flows from Measure of the ability of Operating Activities assets to generate operating

Average Total Assets cash flows

Free cash flow Net Cash Flows from Measure of cash generated or Operating Activities – Dividends cash deficiency after provid- – Net Capital Expenditures ing for commitments