Essay About Average Tax Rate And Short-Term Liquidity Measure

Financial Ratios Case
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Ratios to be calculated: Effective Tax Rate = income tax expense/income earned before taxesEffective tax rate is a ratio termed as a profitability indicator. It is the average tax rate paid by the firm on its earned income. ROE (Return on Equity) = Net Income/Average common equityReturn on equity measures a firm’s profitability. It indicates the extent of profit that a firm generates with the money invested by shareholders. It measures how much of net income is returned as a percentage from shareholders’ equity. ROA (unadjusted) = Net Income/Average total assetsReturn on Assets indicates how profitable a firm is relative to its total assets. It highlights the efficiency of management at generating earnings from its assets. ROA (financing-adjusted) = Net Income + After-tax interest expense + Minority Interest /Average total assets Financial Leverage = Total assets / Shareholders’ Equity The financial leverage ratio shows how much of the company assets belong to the shareholders rather than the creditors. It measures the degree of debt financing of a company. Liabilities/AssetsLeverage ratio that defines the total amount of debt relative to assets. The higher the ratio, the higher is the degree of leverage, leading to financial risk. Interest-bearing debt/AssetsTotal Asset Turnover (TAT) = Sales/average total assetsThe Total Asset Turnover ratio measures the capability of a firm to produce sales efficiently from its assets. It is used to evaluate operations of a business. Net Profit Margin (Profit Margin Percentage) = Net Income/SalesThe Net Profit Margin measures the amount of profit that a firm can obtain from its total sales. It is intended to measure the overall success of a business. Gross Profit Margin = (Sales – CGS)/SalesThe Gross Profit Margin assesses a firm’s financial health through showing the proportion of money that is left over from revenues after accounting for the cost of goods sold. SG&A Percentage = SG&A expenses/SalesSG&A Percentage is the percentage of selling, general and administrative costs to sales. Look for a steady or decreasing percentage indicating that the company is controlling its overhead expenses.Advertising-to-sales percentage = total advertising expense/sales revenueAdvertising-to-sales percentage measures the effectiveness of an advertising campaign calculated by dividing total advertising expenses by sales revenue. It shows whether the resources that a firm spends on an advertising campaign aided in generating new sales. Receivables turnover = Sales Revenue/Average Accounts ReceivableThe receivables turnover is an activity ratio that measures how efficiently a firm manages its credit issued to customers and collects on that credit. It indicates the number of accounts receivable the firm collects during the year. Days Receivable = 365/Accounts receivable turnoverDays Receivable measures the average number of days it takes for a firm to collect revenue after a sale was made. Inventory Turnover= Cost of goods sold/Average InventoriesInventory Turnover shows the number of times that a company’s inventory is sold and replaced over a period. A low turnover implies poor sales and excess inventory. A high turnover in turn indicates strong sales or ineffective buying.Days Inventory = 365/Inventory TurnoverDays Inventory indicates how many days it takes to sell the inventory on hand. Basically, it reveals how quickly management turns inventories into cash. Calculating approximate purchases: Inventoryt-1 + Purchasest = Inventoryt + COGSt Payables Turnover = Total Supplier Purchases/Average Accounts PayablePayables turnover is a short-term liquidity measure. It calculates the rate of pay off from a firm to its suppliers. It is basically a measure of how many times the firm pays off its average amount payable per period.Days Payable = 365/Accounts Payable TurnoverDays Payable measures the average number of days it takes for a firm to pay its suppliers.