Category Archives for "Financial Ratio Analysis"

Return on Assets Ratio

This is an ultimate guide on how to calculate Return on Assets (ROA) ratio with in-depth interpretation, analysis, and example. You will learn how to use its formula to evaluate a company's profitability.

Definition - What is Return on Assets Ratio (ROA)?

When you’re considering investing in a company, you want to feel confident that the business in question is performing effectively enough to generate the greatest returns possible, with the fewest assets.

By calculating a firm’s ROA, you can measure its net earnings against its total assets to determine just how successfully it’s using its resources to profit from its regular business operations.​

Not only will this process allow you to judge how efficient a company’s management team is at generating earnings, it can also indicate just how capable the company is of funding its own growth and expansion.

Considering the fact that the entire purpose behind a firm’s assets is to produce revenue, the return on total assets ratio should play a critical role in your evaluation of any potential investment.

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Inventory to Working Capital Ratio

This is an advanced guide on how to calculate Inventory to Working Capital ratio with thorough interpretation, example, and analysis. You will learn how to utilize its formula to assess an organization's liquidity.

​Definition - What is Inventory to Working Capital Ratio?

The amount of current assets that a company has on hand at any given time, in excess of its current liabilities, is known as its net working capital (NWC).

These funds are what allow a business to run its daily operations.

One of the short-term assets held by many companies is the cash invested in its inventory.

But if this inventory amount is relatively large compared to other assets, it can skew the perception of just how readily available a firm’s cash truly is for paying off short-term debts.

Sometimes a company’s inventory can suffer from extremely low turn-over, or simply becomes outdated and difficult to sell.

The inventory to net working capital ratio allows you to calculate exactly what proportion of a business’s working capital is tied up in its inventory, giving you a more accurate picture of its liquidity position.

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Interest Expense to Debt Ratio

This is a detailed guide on how to calculate Interest Expense to Debt Ratio with in-depth interpretation, analysis, and example. You will learn how to utilize its formula to examine a company's debt settlement capacity.

Definition - What is Interest Expense to Debt Ratio?

The interest expense to debt ratio is a simple calculation that can help us figure out the rate of interest a business is paying on its total debt.

To understand what must be included in a company's debt, we have to look at the interest expense figure.

Interest expense can be found on the company’s Income Statement. It includes the interest outgo on both the short-term and the long-term debt.

Any borrowings that the firm is paying interest on need to be included in the debt figure.

If the interest expense figure includes interest paid on capital leases, then the corresponding leases have to be included in the debt calculation to ensure an apples to apples comparison.

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Days Payable Outstanding

This is an in-depth guide on how to calculate Days Payable Outstanding with detailed analysis, interpretation, and example. You will learn how to use its formula to assess a company's operating efficiency.

Definition - What is Days Payable Outstanding?

The days payable outstanding (DPO), often known as the average payment period, is a calculation that helps determine the efficiency of a business in paying its dues to suppliers.

In short, it measures how long in days it takes for a company to pay off its procured goods and services in a period.

The importance of cash in a business cannot be stressed enough. The days payable outstanding helps bring out the concept of balance and optimization for a business.

You want to pay off your dues to be able to keep your suppliers happy and hold their trust.

However, you also don’t want to finish all your freed up money on short notice. Finding the right balance can spell a world of difference for the company’s cash situation.​

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