Liquidity Ratios are the temporary capabilities of a business to compensate for its established requirements and unanticipated needs for cash. Suppliers and bankers are the short-term creditors who are mostly interested in liquidity ratios. The acid-test ratio, current ratio, inventory ratio, and receivables turnover are the ratios used to establish the companys short-term capability. To determine the current ratio, divide the current assets by the current liabilities (Weygandt, Kimmel, & Kieso, 2010). Liquidity ratios reveal whether or not the company is capable of paying their debts. Current ratio (current assets / current liabilities) 2011 $17,377,957 / $3,685,152 = 4.71:1 2010 $14,524,790 / 2,750,057 = 5.28:1
The acid-test ratio is an evaluation of a businesss direct short-term liquidity. To determine the acid ratio, divide cash, net receivables, and short-term investments by current liabilities (Weygandt, Kimmel, & Kieso, 2010).
Acid-test ratio (cash + Short term Investments + Receivables (Net) / Current Liabilities) 2011 $3,725,406 + $1,734,004 + $3,276,349 / $3,685,152= 2.37:1 2010 $2,807,029 + $1,609,004 + $2,798,318 / $2,750,057=2.62:1
The receivables turnover is a calculation of the liquidity of receivables that computes the average number of times the business accumulates receivables throughout the period. To determine receivables turnover, divide the net credit sales by the average net receivables (Weygandt, Kimmel, & Kieso, 2010).
Receivables turnover (Net credit sales / Average Net Receivables)
The inventory turnover computes the average amount of times the inventory is sold throughout the period. The inventory turnover computes the liquidity of the inventory. To determine inventory turnover, divide the cost of goods sold by the average inventory (Weygandt, Kimmel, & Kieso, 2010).
Inventory turnover (Cost of goods/ Average inventory) 2011 $51,592,470 / $9,709,611 + $8,517,203 / 2 $51,592,470 / $9,113,407 5.66
Profitability Ratios measure the income or operating success of a company for a period of time. Profitability is very important to investors and creditors because they can evaluate the earning power of the organization. Profitability ratios reveal whether or not a company is able to generate revenue.
Asset Turnover: (Sales or revenue / total assets) 2011 $66,608,660 / $47,409,137 1.40
Solvency ratios: The solvency ratios debt to total assets ratio and times interest earned tells creditors if a company will be able to pay maturing debt and interest. Total liabilities divided by total assets is the debt to total assets ratio. Creditors will determine if a company can pay the maturing debt by the lower the percentage of the debt to total assets ratio the more likely it will be able to pay its debts. The times interest earned is income before income taxes and interest expense divided by interest expense. The result of this ratio will tell creditors and investors the companys ability to pay interest as it comes due. The higher the result of times interest earned the easier it is for the company to pay their interest.
Debt to total assets ratio= (total liabilities/ total assets ) 2011 13961155/47409137 29.45%
2010 4878506/34825498 14.00%
Times interest earned (Income before income taxes and interest expense/interest expense) 2011 5019587/1708925 2.94