Ratio Essay Example | Topics and Well Written Essays - 500 words

Ratio - Essay Example In the example, this year's quick ratio is 0.4:1, which means that the company's liquid assets are at four tenths of the value of its current liabilities. The company will not be able to pay current debts with its current liquid assets. The debt to net-worth ratio measures how much the company is in debt. This ratio compares what the business owes to what it owns. It is a measure of the company's ability to meet both its creditor and owner obligations in case of liquidation. The formula is: (total debt or liabilities) / (tangible net worth). The company's inventory turnover ratio measures the number of times the inventory is sold out, or "turned over", in a year. This ratio describes whether business inventory is understocked, overstocked, or obsolete. The formula is: (cost of goods sold) / (cost of the average inventory). The company's average collection period ratio describes the average number of days it takes customers to pay bills. The formula is: (days in accounting period) / [(net sales) / (accounts receivable)]. The net-sales to working-capital ratio measures how many dollars in sales the business makes for every dollar of working capital, where working capital = current assets - current liabilities. This ratio tells you how efficiently working capital is being used to generate sales.