Ratio 860 CHAPTER 14 Measuring ability to pay current liabilities: 1. Current ratio Decision Guidelines How can investors, creditors, and managers measure a company's ability to pay bills, sell inven Using Ratios in Financial Statement Analysis tory, collect receivables, pay long-term debt, and so forth? How can they evaluate stock invest ments? The decision guidelines summarize the ratios that help to answer these questions. Computation Current assets Current liabilities 2. Acid-test (quick) ratio Cash + Short-term + investments Current liabilities Net current receivables Information Provided Measures ability to pay current liabilities with current assets Shows ability to pay all current liabilities if they come due immediately Measuring ability to sell inventory and collect receivables: 3. Inventory turnover 4. Accounts receivable turnover 5. Days' sales in receivables Measuring ability to pay long-term debt: 6. Debt ratio Cost of goods sold Average inventory Net credit sales Average net accounts receivable Average net accounts receivable One day's sales Indicates salability of inventory-the num- ber of times a company sells its average inventory during a year Measures ability to collect cash from credit customers Shows how many days' sales remain in Ac- counts Receivable-how many days it takes to collect the average level of receivables 7. Times-interest- earned ratio Total liabilities Total assets mostod slaiss il on Income from operations Indicates percentage of assets financed with debt Measures the number of times operating income can cover interest expense Interest expense