1. Key Financial Indicators

2. Measures of liquidity  See equations 1 and 2; page 12 of booklet Measures of solvency  See equations 3 – 6; page 13 of booklet Measures of profitability  See equations 7 – 9; page 13 of booklet Measures of economic efficiency  See equations 10 – 14; page 14 of booklet Measures of debt repayment capacity  See equations 15 – 17; page 15 of booklet

3. Measures of Asset Liquidity Current ratio 1. Current ratio: Current assets divided by current liabilities. Demonstrates ability to cover scheduled current liabilities for the coming year out current assets and still have “cash” left over. exceed 1.0 Should exceed 1.0 to be technically liquid. Some firms fail despite exceeding this hurdle.

4. Measures of Asset Liquidity Current ratio 1. Current ratio: Current assets divided by current liabilities. Demonstrates ability to cover scheduled current liabilities for the coming year out current assets and still have “cash” left over. exceed 1.0 Should exceed 1.0 to be technically liquid. Some firms fail despite exceeding this hurdle. Working capital 2. Working capital: Current assets minus current liabilities. Expresses liquidity in dollars rather than ratio. Should be positive. Cash is King!

5. Measures of Credit Liquidity Unused credit reserves 1. Unused credit reserves: LOC extended by lender less current loans on LOC. Demonstrates ability to cover scheduled current liabilities for the coming year out existing available credit. positive Should positive to be technically liquid. Will cover the implicit cost of credit liquidity later in the course.

6. Measures of Cash Flow Liquidity Monthly cash position 1. Monthly cash position: Monthly surplus of cash available less cash required. Demonstrates ability to cover scheduled current liabilities for a particular month out expected surplus cash. positive Should positive to be technically liquid. This requires maintenance of a monthly cash flow statement.

7. Measures of Solvency Debt ratio 1. Debt ratio: Total debt divided by total liabilities. Demonstrates ability to liquidate the firm, cover all liabilities out of all assets, and still have “cash” left over. not exceed 0.50 Should not exceed 0.50 to minimize financial risk exposure. Some firms fail however at lower levels.

8. Measures of Solvency Debt ratio 1. Debt ratio: Total debt divided by total liabilities. Demonstrates ability to liquidate the firm, cover all liabilities out of all assets, and still have “cash” left over. not exceed 0.50 Should not exceed 0.50 to minimize financial risk exposure. Some firms fail however at lower levels. Leverage ratio 2. Leverage ratio: Total debt divided by equity or net worth. Often a credit standard in loan approval decisions. not exceed 1.0 Should not exceed 1.0 to minimize financial risk exposure. Effects of rising interest rates.

9. Measures of Profitability Rate of return on assets 1. Rate of return on assets: Net income before interest and taxes divided by average assets during the year. Demonstrates the accrual adjusted pre-tax return to management total capital invested in the firm. positive Should be positive; the higher the better.

10. Measures of Profitability Rate of return on assets 1. Rate of return on assets: Net income before interest and taxes divided by average assets during the year. Demonstrates the accrual adjusted pre-tax return to management total capital invested in the firm. positive Should be positive; the higher the better. Rate of return on equity 2. Rate of return on equity: Net income before interest and taxes divided equity. Demonstrates return on owner equity invested in the firm. positive Should be positive; the higher the better.

11. Measure of Debt Repayment Capacity Term Debt and Capital Lease Coverage Ratio 1. Term Debt and Capital Lease Coverage Ratio: Funds available from operations to cover scheduled payments divided by scheduled principal payments on term loans and capital leases. After provision for taxes and withdrawals. greater than 1.0 Should be greater than 1.0. Outside income often factored in by lenders.

12. Measure of Debt Repayment Capacity Term Debt and Capital Lease Coverage Ratio 1. Term Debt and Capital Lease Coverage Ratio: Funds available from operations to cover scheduled payments divided by scheduled principal payments on term loans and capital leases. After provision for taxes and withdrawals. greater than 1.0 Should be greater than 1.0. Outside income often factored in by lenders. Debt Burden Ratio 2. Debt Burden Ratio: Total debt outstanding divided by net income. Number of years required to retire total debt if net income remains constant and used entirely for this purpose low Should be low; the lower the better.

13. Know these Concepts These are generally accepted financial indicators of a firm’s financial position and strength. and We will refer to these indicators throughout this course and in MB 664.