Benchmark Report - Glossary

Glossary

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

DAYS OF INVENTORY

Days of inventory is based on inventory "turns." One turn equals 365 days, and five turns equal 73 days.

DAYS OF RECEIVABLES

It is best to conform to internal policy on payables. Negotiate terms to keep your payables as long as you can. Pay when promised, but no earlier.

Leverage Ratios

(Debt-to-Equity) Leverage ratios answer the question, "How risky is this company?" They measure a company's ability to meet short- and long-term obligations, and they indicate how much of the company's assets are financed with debt. They reveal the equity "cushion" to absorb losses as they may occur.

Highly leveraged firms are more vulnerable to business downturns than those with lower debt-to-worth positions. While leverage ratios help to measure this vulnerability, it must be remembered that they vary greatly depending on the requirements of particular industry groups.

DEBT-TO-EQUITY RATIO
Highly leveraged companies (those with heavy debt in relationship to business net worth) are usually more vulnerable to business downturns than those with lower debt-to-equity ratios. Considered the most important leverage ratio, evaluators of a company's worth study the Debt-to-Equity Ratio closely.

Liquidity Ratios

(Current, Quick, Working Capital) Liquidity ratios answer the all-important question, "Can the company pay its bills." In a more proper sense, they measure quality and adequacy of current assets to meet current obligations as they come due.

The ability to pay these obligations is established by the amount of cash on hand, the amount of cash that can be created by the quick conversion of assets, and whether this cash is sufficient to pay the firm's immediate debts. These are key ratios for anybody that interacts with the company.

CURRENT RATIO
Generally, the higher the Current Ratio the greater the "cushion" between current obligations and a company's ability to pay them. The composition and quality of current assets is a critical factor that bankers use in the analysis of any company's liquidity.
QUICK RATIO
Sometimes referred to as the "acid test," the Quick Ratio is a refinement of the Current Ratio. This ratio is a more conservative measure of liquidity and expresses a company's ability to cover its current liabilities by its most liquid assets.
WORKING CAPITAL RATIO
The Working Capital Ratio is a measure of how efficiently working capital is being employed. It is a reflection of the margin of protection for current creditors. A ratio too low may indicate an inefficient use of working capital, while a ratio too high may indicate over-trading.

Lower Quartile

Below which you are performing worse than 75% of your relevant peer group.

Median

Above which you are performing better than 50% of your relevant peer group, and below which you are performing worse than 50% of your relevant peer group.

Profitability Ratios

(Asset Turnover, Return on Assets) Profitability ratios answer the question, "Is this company making any money?" Profitability in any company is the true, bottom-line indicator of financial performance. It is the truest indicator of whether management has been successful or not with their policies, practices, and decisions. In this respect, profitability ratios are a direct reflection on all areas of management.

ASSETS TURNOVER RATIO
Assets Turnover Ratio is a measurement of the productive use of a company's total assets. Largely depreciated fixed assets may cause a distortion of this ratio. Productive use of assets in maximizing sales is a valid measure of any management team's effectiveness.
RETURN ON ASSETS RATIO
Return on Assets Ratio expresses the pre-tax return on total assets and management's effectiveness in employing resources to drive bottom line profits.

Upper Quartile

Above which you are performing better than 75% of your relevant peer group.