Glossaries - Report Companions: Financial Ratios Glossary - Page 1

Accounts Payable: Business Revenue: Accounts Payable divided by Annual Business Revenue, measuring the speed with which a company pays vendors relative to business revenue. Numbers higher than typical industry ratios suggest that the company may be using suppliers to float operations.

Current Liabilities: Inventory: Current Liabilities divided by Inventory: A high ratio, relative to industry norms, suggests over-reliance on unsold goods to finance operations.

Current Liabilities: Net Worth: Current Liabilities divided by Net Worth, reflecting a level of security for creditors. The larger the ratio relative to industry norms, the less security there is for creditors.

Current Ratio: This is the same as Current Assets divided by Current Liabilities, measuring current assets available to cover current liabilities, a test of near-term solvency. The ratio indicates to what extent cash on hand and disposable assets are enough to pay off near term liabilities. The Quick Ratio is applied as a more stringent test.

Days Payables: 365/(Cost of Sales: Accounts Payable ratio): Reflects the average number of days for each payable before payment is made.

Quick Ratio: Cash plus Accounts Receivable, divided by Current Liabilities, indicating liquid assets available to cover current debt. Also known as the Acid Ratio. This is a harsher version of the Current Ratio, which balances short-term liabilities against cash and liquid instruments.

Total Liabilities: Net Worth: Total liabilities divided by Net Worth. This ratio helps to clarify the impact of long-term debt, which can be seen by comparing this ratio with Current Liabilities: Net Worth. Creditors are concerned to the extent that total liability levels exceed Net Worth.