Financial Ratios
Lesson:
If I told you that my company earned $500,000 per year, would you say that I'm doing well?
Probably! $500,000 is a lot of money!
But, slow down there. You don't have all the facts. What if I told you that I had invested $50 million dollars?
That would change things, right?
That would mean that I was earning around a 1% return on my investment. That's terrible! I could have stuck that money in the bank, and received more interest without any risk.
It turns out that it's often helpful to look at one value in terms of another, when we want to evaluate financials.
This lets us compare firms of different sizes.
Evan LLC, the acclaimed shirt importer, has promoted you to the position of Sr. Financial Ratio Engineer. You are tasked with answering all questions regarding financial ratios.
An important customer asked for the name of the ratio that equals
(CURRENT ASSETS - INVENTORIES - PREPAYMENTS) / (CURRENT LIABILITIES)
What ratio is this?
(CURRENT ASSETS - INVENTORIES - PREPAYMENTS) / (CURRENT LIABILITIES)
What ratio is this?
Answer:
- It's the quick ratio (acid-test ratio).