Liquidity Ratios: Short-Term SolvencyCurrent Ratio_______________________________________________Current assetsCash Flow From OperationNet salesInventory TurnoverCost of goods soldPayables TurnoverCost of goods soldAverage Collection PeriodAccounts receivableDays Inventory HeldInventoryDays Payable OutstandingAccounts payableNet Trade CycleActivity Ratios:Asset Liquidity and Asset Management EfficiencyFixed Asset TurnoverNet salesNet salesLeverage ratios: Debt Financing and CoverageTimes Interest EarnedOperating profitProfitability Ratios: Overall Efficiency and PerformanceNet profitCash Return on AssetsMarker RatiosBasic Earnings Per Common Share- RegularAverage Number of Common Shares and Common Stock EquivalentsEarnings Per Common Share- DilutedAverage Number of Common Shares and Common Stock Equivalents-assuming a all dilutive securities are converted to common stockEarnings Per Share- RegularNumber of Common Shares and Common Stock EquivalentsDividend Payout RatioPrice to Earnings RatioLiquidity Ratios: Short-Term SolvencyCurrent Ratio_______________________________________________2002 2001Current assetsCurrent liabilities_______________________________________________ The current ratio is a commonly used measure of short-run solvency – the ability of a firm to meet its short-term debt requirements as they come due. The available cash resources to satisfy these obligations must come primarily from cash or the conversion to cash of other current assets such as accounts receivable and inventories. Accounts receivable and inventory may not be truly liquid. A firm could have a relatively high current ratio but not be able to meet demands for cash because the accounts receivable are of inferior quality or the inventory is salable only at discounted prices.Quick Ratio_____________________________________________________2002 2001Current assets – inventoryCurrent liabilities_____________________________________________________ The quick ratio is a more rigorous test of short-run solvency that the current ratio because the numerator eliminates inventory, considered the least liquid current asset and the most likely source of losses.Cash Flow Liquidity Ratio______________________________________________________________2002 2001Cash + Mkt. Securities + CFO aCurrent liabilities______________________________________________________________aCash flow from operating activities Another approach to measuring short-term solvency is the cash-flow liquidity ratio, which considers cash flow from operating activities (from the statement of cash flows). The cash flow liquidity ratio uses in the numerator (as an approximation of cash resources) cash and marketable securities, which are truly liquid current assets; and cash flow from operating activities, which represents the amount of cash generated from the firm’s operations, such as the ability to sell inventory and collect the cash. It is helpful to compare this ratio to the current and quick ratios. Contradictory pictures between this ratio and other liquidity ratios should be investigated thoroughly because, ultimately,companies need cash to pay high bills. High current and quick ratios combined with low or negative cash flow liquidity ratios could signal problems.Cash Flow From OperationOne of the most important numbers in all of the financial statements is Cash Flow From Operations. It is important to evaluate a firm’s success over time by identifying the underlying causes for the trends and the fluctuations of a firm’s cash from operations.The relative comparisons of cash provided from operations and the net income over time will frequently give an indication if the company is managing earnings. One of the best indications of earnings management is when the growth of net income is up and smooth and the trend of cash from operations is not. Over time these numbers should track in thesame manner. The cash flow from operations are taken directly from the cash flow statement. Accounts Receivable Turnover____________________________________________________2002 2001Net salesAccounts receivable____________________________________________________Inventory Turnover____________________________________________________2002 2001Cost of goods soldInventory____________________________________________________Payables Turnover______________________________________________________2002 2001Cost of goods soldAccounts payable______________________________________________________ The accounts receivable, inventory, and payables turnover ratios measure how many times, on average, accounts receivable are collected in cash, inventory is sold, and payables are paid during the year. These three measures are mathematical complements to the ratios that make up the net trade cycle, and therefore, measure exactly what the average collection period, days inventory held, and days payable outstanding measure fora firm; they provide an alterative way to look at the same information. Average Collection Period____________________________________________________2002 2001Accounts receivableAverage daily sales____________________________________________________ The average collection period for accounts receivable is the average number of days required to convert receivables into cash. This ratio helps gauge the liquidity of accounts receivable – the ability of the firm to collect from customers. It may also provide information about a company’s credit policies. For example, if the average collection period is increasing over time of is higher than the industry average, the firm’s credit policies could be too lenient and accounts receivable not sufficiently liquid. The loosening of credit could be necessary at times to boost sales, but at an increasing cost to the firm. On the other hand, if credit policies are too restrictive, as reflected in an average collection period that is shortening and less than industry competitors, the firm may be losing qualified customers.Days Inventory Held__________________________________________________________2002 2001InventoryAverage daily cost of sales__________________________________________________________ The days inventory held is the average number of days it takes to sell inventory to customers. This ratio measures the efficiency of the firm in managing its inventory. Generally, a low number of days inventory held is a sign of efficient management; the faster inventory