Financial Statements & Ratios
Fi nanci al Rat i os
Suppliers, bankers and outside creditors have a wide range of financial ratios at their disposal to measure the overall financial integrity of the store. The specific ratios most commonly used in this process are covered on this page. Current Ratio = Current Assets ÷ Current Liabilities The current ratio measures the margin of safety that management maintains in order to allow for the inevitable unevenness in the flow of funds through the current assets and current liabilities accounts. A business needs a supply of current funds to be assured of being able to pay its bills when they come due. As a general rule, the current ratio should be 2.0 or higher. Quick Ratio = (Cash + Accounts Receivable) ÷ Current Liabilities Quick assets include cash, marketable securities, and current accounts receivable. Presumably, these items can be converted into cash quickly at approximately their stated amounts, unlike inventory which is the principal current asset excluded from this calculation. The quick ratio is, therefore, a measure of the extent to which liquid resources are readily available to meet current obligations. A guideline for the quick ratio is 1.0 or higher. Accounts Payable To Inventory = Accounts Payable ÷ Average Inventory x 100 This ratio measures the extent to which a business' inventory is financed by the suppliers of that inventory. Increasingly, stores are looking to finance a major portion of their inventory via supplier financing. Accounts Payable Payout Period = Accounts Payable ÷ (Cost Of Goods Sold ÷ 365 Days) The accounts payable payout period measures the timeliness of paying suppliers. This figure is related directly to the normal credit terms of the business' purchases. Debt To Equity = Total Liabilities ÷ Net Worth The greater the proportion of its financing that is obtained from owners, the less worry the business has in meeting its fixed obligations. At the same time excessive reliance on owner financing slows the rate at which the store can grow. The debt to equity ratio shows the balance that management has struck between debt and owners' equity. A mix of $1.00 debt to $1.00 equity is usually considered prudent. EBITDA (% Of Sales) = Earnings Before Interest & Taxes + Depreciation & Amortization ÷ Net Sales x 100 EBITDA is a profitability figure based on earnings before interest, taxes, depreciation and amortization. Since it incorporates depreciation and amortization, it represents the best estimate of the firm’s operating cash margin.
EBIT (% Of Sales) = (Profit Before Taxes + Interest) ÷ Net Sales x 100 EBIT is a profitability figure based on earnings before interest and taxes.
Interest Coverage = (Profit Before Taxes + Interest) ÷ Interest This ratio measures the number of times earnings before interest and taxes will cover interest payments on debt. It also shows the level to which income can decline before a firm is unable to meet its interest obligations.
Conven-
Contractor
ience
Core
Super
Home Center
Oriented
Hardware
Hardware
Hardware
Supply
Financial Ratios
Current Ratio Quick Ratio
6.6 1.8 9.8
6.9 2.2 9.2
5.3 1.6
5.5 2.0
6.3 3.6
Accounts Payable To Inventory (%) Accounts Payable Payout Period (Days)
13.4 14.7
14.4 12.8
10.2 13.8
11.5
12.2
Debt To Equity EBITDA (% Of Sales)
0.3 9.2 8.3
0.4
0.5
0.3 9.9 8.5
0.2 8.6 6.5 8.9
11.4 10.2 26.9
11.8 10.7 33.6
EBIT (% Of Sales)
Interest Coverage
24.1
28.3
11
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