## Working Capital To Debt Ratio

Description The working capital to debt ratio is used to see if a company could pay off its debt by liquidating its working capital. This measure is used only in cases where debt must be paid off at once, since the elimination of all working capital makes it impossible to run a business and will likely lead to its dissolution. Formula Add up cash, accounts receivable, and inventory, and subtract all accounts payable from the sum. Then divide total debt into the result. A variation is to use...

## Cash Reinvestment Ratio

Description This ratio is useful for determining the amount of cash flow that a company is routinely plowing back into the business. This can be indicative of a strong commitment by the owners to build the business. However, it can also mean that a company is being so poorly run that it requires an excessive amount of working capital and fixed assets to stay in business. Formula To calculate the ratio, summarize cash flow for the period, subtract any dividends paid, and then divide the result...

## Fixed Charge Coverage

Cash flow from operations Interest on line of credit Interest on long-term debt Office equipment leases Leases expiring within current year Expected lease on company car Principal payments on long-term debt Balloon payment on long-term debt 850,000 80,000 150,000 45,000 10,000 20,000 200,000 150,000 If all of the fixed expenses and payments in this list were to be added together, they would total 655,000, which would represent a potentially dangerous fixed charge coverage ratio of 655,000 to...

## Operating Leverage Ratio

Description This ratio reveals the extent to which fixed costs are required to create profits, by comparing the amount of fixed costs to operating income. It is particularly useful when a company is considering the acquisition of more fixed assets to replace variable costs, such as manual labor in the production process, and wants to find out the extent to which this will add to its fixed cost structure. This ratio works well when combined with break-even analysis, which is heavily influenced...

## Quality Of Earnings Ratio

Description It can be extremely difficult for an outsider, such as a stock analyst, bank officer, or investor, to determine if the earnings reported by a company are based upon a foundation of solid operational earnings, or if the company is taking advantage of a broad array of accounting tricks that are allowable under generally accepted accounting principles GAAP to artificially bolster its earnings. A simple ratio for determining the quality of reported earnings is the quality of earnings...

## Accumulated Depreciation To Fixed Assets Ratio

Description Comparing the amount of accumulated depreciation to the gross amount of fixed assets recorded on a company's balance sheet can indicate the extent to which a company has continued to replace its existing assets with new ones on an ongoing basis. For example, if the proportion of accumulated depreciation to fixed assets is quite high, it is evidence that not too many assets have been added by a company in recent years, which may in turn lead one to suspect that there is little cash...

## Interest Expense To Debt Ratio

Interest expense Total debt Interest to debt ratio Short-term debt Long-term debt Example An investor suspects that the Paulson Printing Company, maker of fine engraved letterhead, is beginning to have difficulty obtaining debt to finance an acquisition binge. The investor obtains the information in Table 2.12 for the last three years of operations. The ratio reveals that, although the total amount of interest paid in the most recent year has declined, this is based on a smaller amount of...

## Breakeven Point

Description This measure should be in the core group of performance measures that any accountant uses. It measures the sales level at which a company exactly breaks even. This figure is useful for a number of operating decisions, such as determining how much extra productive capacity is available after break-even sales have been manufactured, which tells the management team how much profit can theoretically be generated at maximum capacity levels. It is also good for determining changes in the...

## Repairs And Maintenance Expense To Fixed Assets Ratio

Description This ratio is useful for estimating the age of the collective group of fixed assets listed in the financial statements. If the ratio follows an increasing trend line, then the company is probably in need of some asset replacements. An increasing trend line may also be indicative of high asset-usage levels, which can prematurely require advanced levels of repair work. Of particular interest is an increasing ratio that suddenly drops with no corresponding increase in the amount of...