Liquidity Ratios: Solvency Debt To Asset Ratio (DAR) DAR Is A Debt Ratio Used To

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Liquidity Ratios

The current Ratio is the ratio to measure the company's ability to pay
short-term obligations or debt that is due. The calculation of the current
ratio is done by comparing the total current assets with the total
current debt.

The formula for the current ratio is as follows: CR = 𝑡𝑜𝑡𝑎𝑙 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝑡𝑜𝑡𝑎𝑙 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑥 100% =… ..%

Solvency Debt to Asset Ratio (DAR) DAR is a debt ratio used to


measure the ratio between total debt and total assets. Or how much the
company's assets are financed by debt with total assets.

The DAR formula is as follows: DAR = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑚𝑜𝑢𝑛 𝑜𝑓 𝐷𝑒𝑏𝑡 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 x
100% = .....% )
Profitability Return On Asset (ROA) ROA is the ratio to measure net
profit after tax to total assets. This ratio shows the level of efficiency of
asset management by the company. The greater the ROA, the greater
the level of profit and the better the company's position in terms of asset
use.

The ROA formula is as follows: ROA = 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝑥 100% =
…….%

Efficiency Ratios Example


Efficiency Ratios are a measure of how well a company is managing its
routine affairs. Conceptually, these ratios analyze how well a company utilizes
its assets & how well it manages its liabilities.

Accounts Receivable Turnover


This ratio measures how quickly a company collects bills from its customers.
It indicates how efficient a company’s credit policies are & indicates the level
of investment in receivables needed to maintain the firm’s sales level. The
formula of accounts receivable turnover is:

Formula

Accounts Receivables Turnover = Revenue/Average Accounts Receivable


Average No. of Days Receivables Outstanding

We can go one step further and calculate the average number of days of receivables
outstanding. The formula is:

Average No. of Days Receivables Outstanding = 365/Accounts Receivables Turnover

The result will indicate, on average, how many days a company is collecting its bills.

Inventory Turnover
The inventory turnover ratio measures how efficiently a company manages its
inventory. The formula for inventory turnover is:

Formula

Inventory Turnover = Cost of Goods Sold/Average Inventory

Average No. of Days Inventory in Stock

We can further calculate the average number of days inventory in stock


as follows:

Average No. of Days Inventory in Stock = 365/Inventory Turnover

The result will indicate, on average, how many days a company’s


inventory is held until it is sold.

Accounts Payables Turnover


Although accounts payable are liabilities rather than assets, their trend
is important as they represent an important source of finance for
operating activities, thereby affecting operating efficiency. This ratio is
important because it measures how a company manages its own bills.
The formula of account payables turnover is:

Formula

Accounts Payables Turnover = Total Purchases/Average Accounts Payables


Average No. of Days Payable Outstanding

We can further calculate the average number of days payable outstanding as


follows:

Average No. of Days Payable Outstanding = 365/Accounts Payables Turnover

The result will indicate the average number of days a company pays its
suppliers.

Working Capital Turnover


The working capital turnover ratio reflects the amount of operating capital
needed to maintain a given level of sales. Only operating assets & liabilities
should be used to compute this ratio. The formula of the working capital ratio
is:

Formula

Working Capital Turnover = Sales/Average Working Capital

Note – Working Capital = Current Assets-Current Liabilities

Fixed Assets Turnover


The fixed assets turnover ratio measures the efficiency of a company’s long-
term capital investments. It reflects the level of sales generated by
investments in productive capacity. The formula of fixed assets turnover is:

Formula

Fixed Asset Turnover = Sales/Average Fixed Assets

Total Asset Turnover


This ratio provides a measure of overall investment efficiency by totaling the
joint impact of both short-term and long-term assets. The ratio can be
calculated as follows:
Formula

Total Assets Turnover = Sales/Average Total Assets

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