Acid-Test Ratio The acid-test ratio is a more conservative liquidity ratio because only the current assets easiest to convert into cash are included. Those are: cash, short-term investments, and accounts receivable. Inventory and other current assets more difficult to convert into cash are not included. The acid-test ratio for Tootsie Roll Industries is calculated below: Acid-Test Ratio = Cash + ST Investments + A/R Current Liabilities = $222.4 million $72.0 million = 3.08 Tootsie Roll’s acid-test ratio of 3.08 means the company has three times as much cash, short-term investments and accounts receivable than current liabilities. The company can easily cover its short-term debt obligations. The next chart illustrates how Tootsie …show more content…
It is calculated by dividing the cost of goods sold by the average inventory. Average inventory is calculated by adding the beginning and ending inventory for Tootsie Roll Industries and dividing the sum by two. Inventory Turnover = Cost of Goods Sold Average Inventory = $340.9 million $66.3 million = 5.14 Tootsie Roll’s inventory turnover is 5.14. This means that five times during the year, Tootsie Roll had to replace its inventory. This is good because a high inventory turnover is better than a low one. Let’s look at how Tootsie Roll’s inventory turnover compares with Hershey and Nestle. Figure 4Inventory Turnover for a Few Example Companies The inventory turnover for both Hershey and Nestle is 5.16 times. So Tootsie Roll’s inventory management is consistent with its competition. Measuring Profitability Ratios Profitability ratios measure a company’s ability to use its assets efficiently to produce profits. These ratios provide users of financial information with useful data such as how much net income is generated from each dollar of revenue and how much net income is generated per share of stock. Return on Sales …show more content…
Financial ratios: a percent, rate, or proportion that expresses a mathematical relationship between two financial quantities Liquidity ratios: evaluates how quickly a company can convert short-term assets and liabilities into cash Current ratio: evaluates a company’s ability to pay its short-term debt (current liabilities) Comparing financial data: examining financial data from multiple years to see trend lines for key measures such as net income, revenues, cost of goods sold, operating expenses, and gross margin Acid-test ratio: a more conservative liquidity ratio that evaluates how quickly cash, short-term investments, and accounts receivable can be converted into cash Inventory turnover: how long a company holds onto its services or products (inventory) Profitability ratios: measurements which reflect a company’s ability to use its assets efficiently to produce profits Return on sales/profit margin: provides insight into how efficiently and profitably a company is being run, determined by dividing net income after taxes by net sales Ratio analysis: using comparisons to gather information and see trends Basic earnings per