A reduction in a manufacturers inventory turnover ratio is likely to indicate that the ________.
Financial ratios are used to provide a quick assessment of potential financial difficulties and dangers. Ratios provide you with a unique perspective and insight into the business. If a financial ratio identifies a potential problem, further investigation is needed to determine if a problem exists and how to correct it. Although there are often specific benchmarks attached to ratios to indicate when there is cause for concern, ratios should also be thought of as a continuum from weak to strong with the stronger the ratio the better. Ratios can identify problems by the size of the ratio but also by the direction of the ratio over time. Show
Liquidity RatiosCurrent Ratio - A firm’s total current assets are divided by its total current liabilities. It shows the ability of a firm to meets its current liabilities with current assets. Quick Ratio - A firm’s cash or near cash current assets divided by its total current liabilities. It shows the ability of a firm to quickly meet its current liabilities. Net Working Capital Ratio - A firm’s current assets less its current liabilities divided by its total assets. It shows the amount of additional funds available for financing operations in relationship to the size of the business. Asset Management RatiosDays Sales Outstanding - A firm’s accounts receivables divided by its average daily sales. It shows the average length of time a firm must wait after making a sale before it receives payment. Fixed Asset Turnover Ratio - A firm’s total sales divided by its net fixed assets. It is a measure of how efficiently a firm uses its plant and equipment. Inventory Turnover Ratio - A firm’s total sales divided by its inventories. It shows the number of times a firm’s inventories are sold-out and need to be restocked during the year. Total Assets Turnover Ratio - A firm’s total sales divided by its total assets. It is a measure of how efficiently a firm uses its assets. Debt Management RatiosDebt to Asset Ratio - A firm’s total debt divided by its total assets. It is a measure of how much of the firm is debt financed. Debt Coverage Ratio or Debt Service Coverage Ratio (DSCR) - A firm’s cash available for debt service divided by the cash needed for debt service. It is a measure of a firm’s ability to service its debt obligations. Times Interest Earned Ratio (TIE) - A firm’s earnings before interest and taxes (EBIT) divided by its interest charges. It shows a firm’s ability to meet its interest payments. It is also called the interest coverage ratio. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) Coverage Ratio - A firm’s cash flow available to meet fixed financial charges divided by the firm’s fixed financial charges. It shows the ability of a firm to meet its fixed financial charges. Profitability RatiosProfit Margin on Sales - A firm’s net income divided by its sales. It shows the ability of sales to generate net income. Basic Earning Power (BEP) - A firm’s earnings before interest and taxes (EBIT) divided by its total assets. It shows the earning ability of a firm’s assets before the influence of taxes and interest (leverage). Return on Total Assets (ROA) - A firm’s net income divided by its total assets (both debt and equity supported assets). It shows the ability of the firm’s assets to generate net income. Interest expense is added back to net income because interest is a form of return on debt-financed assets. Return on Equity (ROE) - A firm’s net income divided by its equity. It shows the ability of the firm’s equity to generate profits. Return on Investment (ROI) - A firm’s net income divided by the owner’s original investment in the firm. Earnings per Share - A firm’s net income per share of stock. Market Value RatiosPrice/Earnings Ratio (P/E) - The price per share of a firm is divided by its earnings per share. It shows the price investors are willing to pay per dollar of the firm’s earnings. Price/Cash Flow Ratio - The price per share of a firm divided by its cash flow per share. It shows the price investors are willing to pay per dollar of net cash flow of the firm. Market-to-book value (M/B) - The market value of a firm is divided by its book value. Don Hofstrand, retired extension value added agriculture specialist, LOS 24.b: Classify, calculate, and interpret activity, liquidity, solvency, profitability, and valuation ratios. Question 24.1: A company has a cash conversion cycle of 80 days. If the company's average receivables turnover increases from 11 to 12, the company's cash conversion cycle: Question 24.2: Books Forever, Inc., uses short-term bank debt to buy inventory. Assuming an initial current ratio that is greater than 1, and an initial quick (or acid test) ratio that is less than 1, what is the effect of these transactions on the current ratio and the quick ratio? LOS 24.a: Describe tools and techniques used in financial analysis, including their uses and
limitations LOS 24.d: Demonstrate the application of DuPont analysis of return on equity and calculate and interpret effects of changes in its components. Question 24.5: Al Pike, CFA, is analyzing Red Company by projecting pro forma financial statements. Pike expects Red to generate sales
of $3 billion and a return on equity of 15% in the next year. Pike forecasts that Red's total assets will be $5 billion and that the company will maintain its financial leverage ratio of 2.5. Based on these forecasts, Pike should project Red's net income to be: LOS 24.e: Calculate and interpret ratios used in equity analysis and credit analysis. LOS 24.g: Describe how ratio analysis and other techniques can be used to model and forecast earnings. Question 24.7: A company must report separate financial information for any segment of their business which: READING 25: INVENTORIES LOS 25.a: distinguish between costs included in inventories and costs recognised as expenses in the period in which they are incurred. A) Administrative overhead. Explanation Schweser note: LOS 25.b:
Describe different inventory valuation methods (cost formulas). LOS 25.c: Calculate and compare cost of sales, gross profit, and ending inventory using different inventory valuation methods and using perpetual and periodic inventory systems. LOS 25.d: Calculate and explain how inflation and deflation of inventory costs affect the financial statements and ratios of companies that use different inventory valuation methods LOS 25.f: Convert a company’s reported financial statements from LIFO to FIFO for purposes of comparison Question 25.6: A firm ended the last period with inventory of $4.0 million and a LIFO reserve of $175,000. During the year, it made purchases of $2.0 million and reported sales of $5.5 million with a gross margin of 0.32. At the end of the year, it reported
a LIFO reserve of $75,000. What is the value of the firm's cost of goods sold on a FIFO basis? LOS 25.g: Describe the measurement of inventory at the lower of cost and net realisable value LOS 25.k: Calculate and compare ratios of companies, including companies that use different inventory methods & LOS 25.l: Analyze and compare the financial statements of companies, including companies that use different inventory methods LOS 25.j: Explain issues that analysts should consider when examining a company’s inventory disclosures and other sources of information LOS 25.i: Describe the financial statement presentation of and disclosures relating to LOS 25.h: Describe implications of valuing inventory at net realizable value for financial statements and
ratios. What does a decreasing inventory turnover ratio usually indicate about a firm?Inventory Turnover Calculation
A decreasing inventory often indicates that the company is not converting its inventory into cash as quickly as before. When this occurs, the company ends up having increased storage, insurance and maintenance costs.
What does a decrease in inventory days mean?A low days inventory outstanding indicates that a company is able to more quickly turn its inventory into sales. Therefore, a low DIO translates to an efficient business in terms of inventory management and sales performance.
Which of these would cause the inventory turnover ratio to increase the most?Which of these would cause inventory turnover to increase the most? Increasing the amount of inventory on hand.
Is inventory turnover a liquidity ratio?Inventory turnover (IT) is a liquidity ratio that measures a company's ability to generate sales from its inventory.
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