LIQUIDITY RATIOS
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12-31-03 |
12-31-04 |
12-31-05 |
Industry
Average
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Current Ratio
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Total current
assets divided by total current
liabilities. |
1.3 |
1.1 |
1.1 |
1.4 |
This ratio is a rough indication of a firm's ability to service its current obligations. Generally, the higher the current ratio, the greater the "cushion" between current obligations and your Company's ability to pay them. The composition and quality of current assets is a critical factor in the analysis of your Company's liquidity.
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Quick Ratio |
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Cash plus trade receivables divided by
total current liabilities. |
0.9 |
0.8 |
0.8 |
0.8 |
Also know as the
"Acid Test" ratio, it is a refinement of the current ratio and
is a more conservative measure of liquidity. The ratio expresses the
degree to which your current Company's current liabilities are covered by
the most liquid current assets. Generally, any value of less than 1 to 1
implies a "dependency" on inventory or other current assets to
liquidate short-term debt. |
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Sales/Receivables |
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Net sales divided by average trade
receivables. |
8.4 |
7.5 |
6.9 |
7.4 |
This ratio measures the
number of times trade receivables turn over during the year. The higher
the turnover of receivables, the shorter the time between sale and cash
collection. If your Company's receivables appear to be turning slow,
further research is needed and the quality of the receivables should be
examined closely.
A problem with this ratio
is that it compares one day's receivables, shown at the balance sheet
date, to total annual sales and does not take into consideration seasonal
fluctuations. An additional problem in interpretation may arise when there
is a large proportion of cash sales to total sales. |
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Days' Receivables |
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The sales/receivables
ratio divided into 365 (days in year). |
43 |
49 |
53 |
49 |
This figure expresses the
average time in days that receivables are outstanding. Generally, the
greater number of days outstanding, the greater the probability of
delinquencies in accounts receivable. Your Company's daily receivables may
indicate the extent of the Company's control over credit and collections. |
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Cost of Sales/Inventory
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Cost of sales divided by
average inventory. |
11.0 |
13.0 |
13.1 |
9.8 |
This ratio measures the
number of times inventory is turned over during the year. High inventory
turnover can indicate better liquidity or superior merchandising.
Conversely, it can indicate a shortage of needed inventory for
sales. Low inventory turnover can indicate poor liquidity, possible
overstocking, obsolescence, or in contrast to these negative
interpretations a planned inventory buildup in the case of material
shortages.
A problem with this ratio
is that it compares one day's inventory to cost of goods sold and does not
take seasonal fluctuations into account. |
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Days' Inventory
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The cost of
sales/inventory ratio divided into 365 (days in year). |
33 |
28 |
28 |
37 |
This figure expresses the
average time in days that units are in inventory. |
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Cost of Sales/Payables |
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Cost of sales divided by
average trade payables. |
8.0 |
5.9 |
5.6 |
8.9 |
This ratio measures the
number of times trade payables turn over during the year. The higher the
turnover of payables, the shorter the time between purchase and payment.
If your Company's payables appear to be turning slow, then the Company may
be experiencing cash shortages, disputing invoices with suppliers,
enjoying extended terms, or deliberately expanding its trade credit. If
your Company buys on 30-day terms, it is reasonable to expect this ratio
to turn over in approximately 30 days.
A problem with this ratio is that it compares one day's payables to cost
of goods sold and does not take seasonal fluctuations into account. |
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Days Payables |
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The cost of sales/payables ratio divided into 365 (days in year).
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46
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61 |
65 |
41 |
This figure
expresses the average time in days that payables are outstanding.
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Sales/Working Capital
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Net sales divided by working capital.
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22.4 |
47.3 |
39.1 |
13.6 |