Definition: The Average Collection Period, also called as Debt Collection Period, shows how much time business takes to realize the credit sales. Simply, how long will it take to recover payments from the debtors against the credit sales? This period encompasses the duration when the credit was given to the customer or client and the date when the cash was realized against … [Read more...] about Average Collection Period
Debtors Turnover Ratio
Definition: The Debtors Turnover Ratio also called as Receivables Turnover Ratio shows how quickly the credit sales are converted into the cash. This ratio measures the efficiency of a firm in managing and collecting the credit issued to the customers. One important thing that needs to be taken care of is, generally the companies use total sales in the place of net sales, … [Read more...] about Debtors Turnover Ratio
Inventory Turnover Ratio
Definition: The Inventory Turnover Ratio, also called as Stock Turnover Ratio, shows how frequently the inventory is converted into the sales. Simply, this ratio measures the capacity of a firm to generate revenues from the sale of its inventory. Ideally, the company’s inventory turnover ratio should be compared with the industry average. But however, companies do evaluate … [Read more...] about Inventory Turnover Ratio
Cash Ratio
Definition: The Cash Ratio shows how quickly the firm can pay off its liabilities relative to Cash, bank balances, marketable securities since these are considered as the most liquid component of the current assets. Simply, this ratio measures the ability of a firm to meet its current obligations with the cash or cash equivalents. It is the most stringent liquidity ratio and … [Read more...] about Cash Ratio
Acid-test Ratio
Definition: The Acid Test Ratio also referred to as a Quick Ratio is calculated to determine the ability of a firm to pay off its current liabilities with Quick Assets. What are Quick Assets? The quick assets are the current assets that are highly liquid and can be converted into cash within 90 days or in a short period of time. Generally, all the current assets are the … [Read more...] about Acid-test Ratio
Current Ratio
Definition: The Current Ratio is the part of the liquidity ratio that helps to determine the firm’s ability to pay off its short-term obligations with its Current Assets. Simply, a firm uses the current assets, such as cash, cash equivalents, marketable securities, bills receivables, etc. to meet its short-term debt. Generally, the current assets more than twice the current … [Read more...] about Current Ratio
Return on Capital Employed
Definition: The Return on Capital Employed Ratio measures the profits generated from each capital employed. Unlike return on equity that measures only the company’s common equity, the return on capital employed is a comprehensive approach that measures the overall financial performance of the company, by taking both the equity and the liabilities into consideration. The … [Read more...] about Return on Capital Employed
Return on Equity Ratio
Definition: The Return on Equity Ratio shows how efficiently the company utilizes the shareholder’s money in generating the revenues for the firm. The investors are more concerned with this ratio, as they want to see how their funds are being utilized by the company. The return on equity ratio can be used by the company internally or by the investors to evaluate the … [Read more...] about Return on Equity Ratio
Return on Assets Ratio
Definition: The Return on Assets Ratio shows how well a company can convert its investment in assets into profits or simply, it is the ratio that measures the ability of a company to convert the money spent on purchasing the assets into net income and profits. It is also referred to as Return on Investments, i.e. how much profit a firm is generating out of the investments. … [Read more...] about Return on Assets Ratio
Net Profit Margin Ratio
Definition: The Net Profit Margin Ratio shows the net income earned from the sale of goods and services or simply, how much profits are generated at a certain level of sales. This ratio shows the earnings or the revenues left for the shareholders, both equity and preference shareholders, after making the payment of all the operating expenses, interest, taxes, etc. The net … [Read more...] about Net Profit Margin Ratio