Detailed Ratio Analysis

2098 words - 9 pages

Detailed Ratio Analysis
Liquidity ratios measure a company’s ability to meet its maturing short-term obligations. In other words,
can a company quickly convert its assets to cash without a loss in value if necessary to meet its
short-term obligations? Favorable liquidity ratios are critical to a company and its creditors within a
business or industry that does not provide a steady and predictable cash flow. They are also a key
predictor of a company’s ability to make timely payments to creditors and to continue to meet
obligations to lenders when faced with an unforeseen event.
Current Ratio
Current Assets / Current Liabilities
This ratio reflects the number of times short-term ...view middle of the document...

A lower number
for this ratio is preferred, indicating that a company has a satisfactory level of working capital and
accounts receivable makes up an appropriate portion of current assets.
The accounts receivable to working
capital ratio for Liberty Medical Group is
-0.67, which compared to the baseline
of -0.69 indicates the company's
performance may be insufficient in this
area.
Inventory to Working Capital
Inventory / (Current Assets - Current Liabilities)
This ratio measures the dependency of working capital on inventory. A lower number for this ratio is
preferred indicating that a company has a satisfactory level of working capital and inventory makes up a
reasonable portion of current assets.

The inventory to working capital ratio for
Liberty Medical Group is -0.06, which
compared to the baseline of -0.07
indicates this ratio may not be in line
with company goals.
Long Term Liabilities to Working Capital
Long Term Liabilities / (Current Assets - Current Liabilities)
This ratio measures the degree to which a company's long-term debt has been used to replenish
working capital versus fixed asset acquisition.
The long-term liabilities to working
capital ratio for Liberty Medical Group is
-1.67, which compared to the baseline
of -1.67 indicates the value of this ratio
is meeting the company's expectations.
Accounts Receivable Turnover
Sales / Trade Accounts Receivable
This ratio measures the number of times receivables turn over in a year and reveals how successful a
company is in collecting its outstanding receivables. A higher number is preferred because it indicates
a shorter time between sales and cash collection.

The accounts receivable turnover for
Liberty Medical Group is 60.04, which
compared to the baseline of 57.17
indicates this ratio is on target with
company objectives.

Days Sales in Receivables
Trade Accounts Receivable / (Sales / Days)
This ratio measures the average number of days a company's receivables are outstanding. A lower
number of days is desired. An increase in the number of days receivables are outstanding indicates an
increased possibility of late payment by customers. Companies should attempt to reduce the number of
days sales in receivables in order to increase cash flow. The general rule used is that the time allowed
for payment by the selling terms should not be exceeded by more than 10 or 15 days.
The days sales in receivables for Liberty
Medical Group is 6.08 days that indicates
the company is effective in collecting
outstanding receivables.
Operating Cycle Days
(Inventory / (Cost of Sales / Days)) + (Trade Accounts Receivable / (Sales / Days))
This ratio calculates the total conversion period for a company, or in other words, the average number
of days it takes to convert inventory into cash from sales. It is calculated by adding together the days
cost of sales in inventory to the days sales in receivables. Evaluating this ratio can be helpful in
...

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