What is Fixed Assets Turnover Ratio?The fixed asset turnover ratio calculates a company’s ability to generate sales by using fixed asset investments. The items required to calculate fixed assets turnover are net sales which are divided by average net fixed assets. The ratio offers an insight into a company’s returns generated from the use of fixed assets, such as land, property, and machinery. In simple words, this ratio is used to judge the obtained amount of sales generated by the conversion of assets (into sales).Formula −The formula for Fixed Assets Turnover (FAT) is as follows −$$\mathrm{\mathrm{FAT}\:=\:\frac{\mathrm{Net \:Sales}}{\mathrm{Average\:Net\: Fixed \:Assets}}}$$Or$$\mathrm{\mathrm{FAT}\:=\:\frac{\mathrm{Net \:Sales}}{\mathrm{\left ( ... Read More

Net working capital ratio shows how much of a company’s current liability can be met with the company’s current assets. The net working capital ratio is the measure of a company’s capability in meeting the obligations that must be paid within the foreseeable future. Therefore, it shows the liquidity that is available with the company to meet the liabilities.In other words, the net working capital ratio provides the stakeholders of a business with the idea of the business’s liquidity by showing how effective it is in paying off the current liabilities or the short-term debt using its current assets. The ... Read More

What is Activity Ratio?The financial ratios that measure the utility of assets by converting assets into sales are known as activity ratios. These ratios are employed to measure the efficiency with which a firm manages and utilizes its assets. These ratios are also called turnover ratios because they imply how many times assets are turned over into sales within a specific period of time.The activity ratio is calculated by dividing the net sales by the working capital.Types of Activity RatiosThe main types of activity ratios are as follows −Inventory Turnover RatioDebtors Turnover RatioAssets Turnover RatiosLet us see each of the ... Read More

What is Current Asset Turnover Ratio?The current assets turnover ratio indicates how many times the current assets are turned over in the form of sales within a specific period of time. A higher asset turnover ratio means a better percentage of sales. That is why the more the amount of current asset turnover ratio, the better the ability of the company to generate sales.Creditors. look for a higher current asset turnover ratio because it shows that a company is strong in its fundamentals. The creditors. look at the current asset turnover ratio because they are interested in the performance of ... Read More

What is Cash Ratio?A cash ratio is the ratio that measures a company’s ability to pay off its current liabilities with cash and cash equivalents. The cash ratio is different from quick ratio and current ratio in the sense that the cash ratio considers current assets that are only cash and nothing else. Therefore, the cash ratio is more restrictive in nature than the current and the quick ratio.As the cash ratio looks only at cash, creditors. like to consider this ratio more than anything else. This ratio shows the ability of the company to shed off its current debt, ... Read More

What is Asset Turnover Ratio?The assets turnover ratio explains the turnover of assets into sales. It is an efficiency ratio that implies a firm’s ability to generate sales from the assets. For this purpose, the net sales figure is compared with the total average assets.The total asset turnover ratio measures net sales as a percentage of assets to show how many sales are created from each rupee of assets.Example − An asset turnover ratio of 0.5 shows that each rupee of assets generates 50 paise of cash.How to Calculate Asset Turnover Ratio?The formula for calculating Asset Turnover is the following ... Read More

What is Current Ratio?The correct way to measure the current ratio is to divide current assets by current liabilities.$$\mathrm{Current\: Ratio\:=\:\frac{Current\: Assets}{Current\: Liabilities}}$$Here, current assets include items that are short-term in nature. Both assets and liabilities in the current ratio are meant for items that exist within one year from the date of calculation. As the current ratio is a measure of the short-term solvency of a firm, items that are valid beyond one year are not considered in the calculation.Current AssetsCurrent assets in the calculation of the current ratio include cash and cash equivalents, and items that can be converted ... Read More

What is a Quick Ratio?Cash is an indispensable resource for business firms as cash works as a fuel to run business operations successfully. Lack of cash may push a company to insolvency which is an inability to pay the current expenses. Long-term insolvency may push firms to bankruptcy. Therefore, knowing the position of a company in terms of available cash or liquidity is of utmost importance for the firm. Here’s where the quick ratio comes in handy.A quick ratio is an indicator of a firm’s ability to meet short-term expenses. In simple, it can be termed as the indicator of ... Read More

Leverage ratios show the debt position of a company. Debt is an important part of finance for a firm. While debt is necessary to fund projects, excessive debt can be a sign of financial illness of a firm. In fact, both excess and too less availability of debt is detrimental for a firm.As debt ratios show relationships with other items, they can be an eye-opener for management, owners, and investors. An optimum level of debt not only shows the good financial health of a company, but also means that the company would grow in the near and long-term future without ... Read More

Purpose of Leverage Ratio CalculationTo determine the long-term financial position of a company, its financial leverage is calculated. The method of increasing shareholder’s return using debt is known as Financial Leverage. Leverage ratios are, thus, connected to the processes where debt is used to magnify the shareholder’s returns.In fact, excessive debt is a risky proposition for a firm. It has to pay interests to the lenders when a firm acquires debt. Moreover, the debt providers may also ask for payment when the pre-set duration of lending ends. A firm is obligated to pay the lender's amount back within a specified ... Read More