Liquidity Ratio & Activity Ratio

Liquidity Ratio:-

Liquidity ratios measure the availability of cash to pay debt.

• Current ratio:-

Current Assets

Current Liabilities

• Acid-test ratio (Quick ratio):-

Current Assets – ( Inventories + Prepayments )

Current Liabilities

• Operation cash flow ratio:-

Operation Cash Flow

Total Debts

Activity ratios:-

Activity ratios measure the effectiveness of the firms use of resources.

• Average collection period:-

Accounts Receivable

Annual Credit sales / 365 Days

• Degree of Operating Leverage (DOL):-

Percent Change in Net Operating Income

Percent Change in Sales

• DSO Ratio:-

Accounts Receivable

Total Annual Sales / 365 Days

• Average payment period:-

Accounts Receivable

Total Credit Purchage / 365 Days

• Asset turnover:-

Net Sales

Total Assets

• Inventory turnover ratio:-

COGS

Average Inventory

• Receivables Turnover Ratio:-

Net Credit Sales

Average Net Receivables

• Inventory conversion ratio:-

365 Days

Inventory Turnover

• Inventory conversion period:-

(Inventory/COGS) 365 Days

• Receivables conversion period:-

( Receivables / Net Sales ) 365 Days

• Payables conversion period:-

( Purchases /Accounts Payable ) 365 Days

• Cash Conversion Cycle:-

Inventory Conversion Period + Receivables Conversion Period - Payables Conversion Period