![]() ![]() ![]() Interpretation: this indicates how efficiently a company generates revenue with its working capital. Interpretation: this reflects the average number of days that a company takes to pay its suppliers.Ĭomputation: revenue/average working capital Interpretation: this measures the number of times per year that a company theoretically pays off all its creditors.Ĭomputation: number of days in period/payables turnover A low DSO indicates that a company is efficient in its credit and collection processes.Ĭomputation: purchases/average trade payables It reflects how fast a company collects cash from customers to whom it extends credit. Interpretation: this measures the time that elapses between a sale and cash collection. Similarly, it could imply that a company’s credit or collection policies are too stringent.Ĭomputation: number of days in period/receivables turnover A relatively high receivables turnover ratio may indicate that a company has highly efficient credit and collections. Interpretation: this measures the efficiency of a company’s credit and collection processes. A lower DOH implies that inventory is held for a shorter time period. Interpretation: the ratio can also be used to measure the effectiveness of inventory management. A higher inventory turnover ratio implies that inventory is held for a shorter time period.Ĭomputation: number of days in period/inventory turnover Interpretation: the ratio can be used to measure the effectiveness of inventory management. The list below describes the most commonly used activity ratios:Ĭomputation: cost of goods sold/average inventory These ratios generally combine income statement information in the numerator and balance sheet information in the denominator. They measure how efficiently a company performs its daily tasks such as managing its various assets. Activity RatiosĪctivity ratios are also known as asset utilization ratios or operating efficiency ratios. However, all categories are important in the evaluation of a company’s overall ability to generate cash flows from its business operations. Each category measures a different aspect of a company’s business. Although the names of these categories and the ratios that are included in each of them can vary significantly, common categories that are used include activity, liquidity, solvency, profitability, and valuation ratios. Financial ratios can assist with company and security valuations, as well as stock selections, and forecasting.Ī variety of categories may be used to classify financial ratios. Financial ratios are used to express one financial quantity with reference to another.
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