LIQUIDITY RATIOS

12-31-03

12-31-04

12-31-05

Industry
Average



Current Ratio


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.


Quick Ratio


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.


Sales/Receivables


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.


Days' Receivables


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.


Cost of Sales/Inventory


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.


Days' Inventory


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.


Cost of Sales/Payables


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.


Days Payables


The cost of sales/payables ratio divided into 365 (days in year).

46 61 65 41


This figure expresses the average time in days that payables are outstanding.


Sales/Working Capital


Net sales divided by working capital.

22.4

47.3 39.1 13.6


Working capital is a measure of the margin of protection for current creditors. It reflects the ability to finance current operations. Relating the level of sales arising from operations to the underlying working capital measures how efficiently working capital is employed. A low ration may indicate an inefficient use of working capital while a very high ratio often signifies overtrading - vulnerable position for creditors.




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