Other Ratios and Their Uses

Name: Other Ratios and Their Uses
Author: Glenn Dickerson

Learn to calculate multiple types of ratios.

Preview the first lesson free — get full access to all 4 lessons.

Course: On-Demand

There is no shortage of ratios that you can use to calculate facets of your finances outside of profitability. Let's take a look at efficiency, leverage, liquidity, and market value ratios. First, let's go over the importance of the use of efficiency ratios. Efficiency ratios measure the company's ability to utilize its assets effectively in current operating periods, as well as in the short-term and long-term business operations. All of these ratios measure the time it takes a company to earn cash or income by selling its inventory to its customers. The more efficiently a company is managed, the more likely it is to generate income and maximum profit over the longterm. Analysts typically look to these ratios first when analyzing an organization's profit potential. There's often a strong relationship between good efficiency ratios and profitability. Because when companies effectively manage their assets, they tend to generate strong income. Efficiency ratios include the following, inventory turnover ratio, asset turnover ratio, and receivables turnover ratio. The inventory turnover ratio provides insights into a company's sales. It details how effectively a company manages its inventory. Higher turnover ratios are a result of higher sales and revenue generating opportunities for your business. Business analysts use this ratio to determine if enough sales are being generated to utilize or turn the inventory over to the business's customers. This ratio is also useful to managers who use it to determine how well inventory is being used and whether management is buying too much or too little. The inventory turnover ratio is defined as the cost of goods sold divided by average inventory. The asset turnover ratio is a measure of the value of a company's sales or revenues as it relates to the value of their assets. The higher the ratio, the more efficient the company is at generating revenue from the assets that it owns. This measure is useful in comparing similar companies in the same industry or group. This ratio is typically calculated on an annual basis and should be examined over a long period of time to determine if a company's performance is improving or deteriorating. Higher asset turnover ratios are indicative of management using its assets efficiently. Lower ratio results may indicate poor management and inefficient use of assets to generate revenue. The asset turnover ratio is defined as net sales divided by average total assets. The receivables turnover ratio measures the ability of a company to collect the money its customers owe it. Sales to customers are either done on a cash basis or on credit. Credit sales are known as accounts receivable. This measurement determines how well the company is managing its cash and the collection of sales on credit that it extends to its customers. It's useful to compare a given company's turnover ratio to other companies in the same industry to gauge how they're performing in comparison to their competitors. Higher receivables turnover ratios are considered favorable when compared to other companies in the same industry. This higher ratio indicates that the company in question is more effective in collecting money owed to them by the customers that they have extended credit to. The receivables turnover ratio is calculated as net credit sales divided by average accounts receivable.

Beginner Provider : Glenn Dickerson 4 Lessons · 16m in Arabic, German, English, Spanish, French, Portuguese, Chinese

Course Description

These lessons introduce four categories of financial ratios: efficiency ratios, leverage ratios, liquidity ratios, and market value ratios. You will learn how using these ratio types and profitability ratios gives a more complete financial analysis of a company.

What You'll Learn

Calculate multiple financial ratios across efficiency, leverage, liquidity, and market value categories
Apply efficiency ratios to analyze a company's financial performance
Use leverage ratios to evaluate a company's financial position
Assess a company's short-term financial standing with liquidity ratios
Interpret market value ratios as part of financial analysis
Combine these ratio types with profitability ratios for a broader, deeper financial analysis

Key Takeaways

The course introduces four categories of financial ratios: efficiency ratios, leverage ratios, liquidity ratios, and market value ratios.
Using these ratio types together with profitability ratios gives a more complete financial analysis of a company.
Applying multiple financial ratios provides a broader and deeper analysis of a company than relying on any single ratio.
Learners practice calculating multiple financial ratios across the covered categories.

Frequently Asked Questions

What financial ratios does this course cover?

It covers four categories of financial ratios: efficiency ratios, leverage ratios, liquidity ratios, and market value ratios, and explains how they work alongside profitability ratios.

What will I be able to do after taking this course?

You will learn to calculate multiple financial ratios and understand how using them together provides a broader, deeper financial analysis of a company.

Why use multiple financial ratios instead of just one?

Using these ratio types together with profitability ratios gives a more complete financial analysis of a company.

What lessons are included in this course?

The lessons are Efficiency Ratios, Leverage Ratios, Liquidity Ratios, and Market Value Ratios.