SourcingApps Financial Analysis
Payment Terms Calculators for
Discount Extended Terms
Financial Data for
Financial Analysis
for
Solvency Ratios
for Leverage Ratios
for
Profitability Ratios
for Z-Score Assessment
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SourcingApps
Payment Discount Calculator
Is an early payment discount worth taking?
Calculate the
annual percentage rates and annual earnings on savings when a buyer takes
the early payment discount offered by a seller.
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Extended Terms
What is the
financial benefit of extending payment terms?
Perform a Financial Ratio Analysis for new suppliers where there are
significant dollars; critical technologies; alliances or partnerships.
Financial analysis assists in the management of the business risk associated
with close linkages between buyers and sellers.
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SourcingApps
Financial Source Information
Data input document for all financial ratio and Z-score
calculations.
Perform a Ratio and Z-Score analysis for new suppliers
where there are significant dollars; critical technologies; alliances or
partnerships. Financial analysis assists in the management of the business
risk associated with close linkages between buyers and sellers.
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SourcingApps
Financial Solvency
Eight ratios describe Solvency
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Quick Ratio is also known as the Acid Test Ratio. [Quick Ratio = (Cash
+ Receivable) / (Current Liabilities)]. It measures the ability to meet current
liabilities. A 1:1 ratio indicates that the business in a liquid condition.
A .25 :1 ratio is concerning.
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Current Ratio is defined as (Current Ratio = Current Assets / Current
Liabilities). It measures the ability to meet current liabilities. A 2:1
ratio is considered normal. A 1:1 ratio is considered appalling.
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Current Liabilities to Net Worth is defined as (Current Liabilities
to Net Worth = Current Liabilities / Net Worth) A ratio less than or
equal to 50%) is desireable. 67% or more is very undesirable.
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Current Liabilities to Inventory is defined as (Current Liabilities
to Inventory = Current Liabilities / Inventory). It measures a firms reliance
on selling inventory to pay its current liabilities . A reasonable figure
is 250% (2.5 to 1) for industrial companies.
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Total Liabilities to Net Worth is defined as (Total Liabilities to
Net Worth = Total Liabilities / Net Worth). It is also know as Total Debt
to Equity. This ratio measures the amount of assets bought with investors'
money and the amount that was purchased with creditors' money. The standard
is 61% (.61 to 1) the larger the ratio the more debt money used and
the greater a firms difficulty in meeting its financial obligations.
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Fixed Assets to Net Worth is defined as (Fixed Assets to Net Worth
= Fixed Assets / Net Worth). This ratio measures liquidity by comparing "fixed"
assets with "fixed" capital. Therefore smaller is better. Greater than 75%
(.75 to 1) should merit caution.
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Days' Sales Outstanding is also known as Average Collection
Period. It is defined as (Days' Sales Outstanding = Accounts Receivable x
365 / Annual Sales). The ratio best expresses the quality of a firms account
payable. For Net30 terms Days' Sales Outstanding of between 35 days and 55
days is normal.
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Inventory Turnover is defined as (Inventory Turnover = Cost of Goods
Sold / Inventory) and measures how fast inventory is turned over.
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Financial Leverage
Nine ratios describe Leverage. They all are an indication of how
a firm gets its operating funds..
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Collection Period is defined as (Collection Period = Accounts Receivable
/ Sales X 365). It is measured in days. If the collection period is in excess
of 40 days for Net30 terms it signals slow-turning receivables and hence
dependence on other sources for operating funds.
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Sales to Inventory is defined as (Sales to Inventory = Net Sales /
Inventory) and measures how many times inventory is turned. While there
is no published standard here, the higher this turnover the more readily
operating funds will be coming from sales rather than say debt.
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Assets to Sales is defined as (Assets to Sales = Total Assets / Net
Sales). The lower this ratio the better a firm is at utilizing its assets.
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Sales to Net Working Capital is defined as (Sales to Net Working Capital
= Net Sales / Net Working Capital). This ratio is highly variable by industry,
however a recent industrial composite is 8 to 1.
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Accounts Payable to Sales is defined as (Accounts Payable to Sales
= Accounts Payable / Net Sales). This ratio measures payments to suppliers.
Lower is better than higher inasmuch as a firm does a good job of
managng its payables.
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Debt to Equity is defined as (Debt to Equity = Total Liabilities /
Equity) also known as Debt to Net Worth. It measures the amount of long term
protection available to creditors, stockholders or any other entity able
to assess a claim against a firm. When this ratio moves beyond 3:1,
the firm is highly leveraged.
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Current Debt to Equity it defined as (Current Debt to Equity = Current
Liabilities / Equity). It measures the amount of immediate protection available
to creditors, stockholders or any other entity able to assess a claim against
a company. A ratio over 1 could signal serious trouble for most industries.
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Interest Coverage is also known as Times-Interest-Earned Ratio and
is defined as (Interest Coverage = Pretax Income + Interest Expense / Interest
Expense). This ratio calculates the number of times a firms interest is covered
by earnings. It is best if this this ratio is over 3.
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Debt Services is defined as (Debt Services = Pretax Income + Interest
Expense + Depreciation / Interest Expense + Principle Due in Next Year).
It measures to what extent debt services are covered. A ration
in the neighborhood of 2 is acceptable. Highger than 2 is better
than lower.
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Financial Profitability
Four ratios are used to describe Profitability.
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Return on Investment is also known as Return on Assets and Rate Earned
on Total Assets. It is defined as (Return on Investment = Net Profit
/ Total Assets). It measures the earning power of the company's assets and
thus the effectiveness of its management.
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Return on Sales is also known as Profit Margin. It is defineds
as (Return on Sales = Net Profit After Taxes / Net Sales). It measures
the profit per dollar of sales. The higher this ratio the better able the
firm is able to weather adverse business condition such as falling prices
and rising costs.
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Return on Equity also known as Rate Earned on Stockholders Equity
and Return on Net Worth. It is defined as (Return on Equity = Net Profit
/ Equity). This ratio is as close as one can get on the true performance
of a business.
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Return on Invested Capital is defined as (Return on Invested Capital
= Net Profit After Taxes/Long Term Debt + Equity).
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Z-Score Analysis
The Z-Score is a measure of a company's health and utilizes several key ratios
for its formulation. The model was developed in the late 1960's by Edward
I. Altman, professor of finance at New York University School of Business.
The model incorporates five weighted financial ratios into the calculations
of the Z-Score. Professor Altman continues to update the model's coefficients
to reflect changing ways of conducting business. The coefficient values used
in this SDS, Inc. Supplier Financial Analysis Notebook were published in
1993 in Professor Altman's book entitled "Corporate Financial Distress and
Bankruptcy", 2nd edition Copyright 1993 by John Wiley & Sons, Inc. ISBN
0-471-55253-4. Prof. Altman has defined 5 variables that comprise the
Z-score for public and private comapnies.
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X1 Component of Z-Score is defined as (X1=Working Capital/Total Assets).
The ratio of Working Capital to Total Assets is the Z-Score component which
is considered to be a reasonable predictor of deepening trouble for a company.
A company which experiences repeated operating losses generally will suffer
a reduction in working capital relative to its total assets.
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The X2 Component of Z-Score is defined as(X2=Retained Earnings/Total
Assets). The ratio of Retained Earnings to Total Assets is a Z-Score component
which provides information on the extent to which a company has been able
to reinvest its earnings in itself. An older company will have had more time
to accumulate earnings so this measurement tends to creates a positive bias
towards older companies.
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X3 Component of Z-Score is defined as (X3=Earnings Before Taxes +
Interest/Total Assets). This ratio adjusts a company's earnings for
varying income tax factors and makes adjustments for leveraging due to
borrowings. These adjustments allow more effective measurements of the company's
utilization of its assets.
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The X4 Component of Z-Score is defined as (X4=Market Value of Equity/Total
Liabilities). This ratio gives an indication of how much a company's assets
can decline in value before debts may exceed assets. Equity consists of the
market value of all outstanding common and preferred stock. For a private
company the book value of equity is used for this ratio. This depends on
the assumption that a private company records its assets at market value.
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The X5 Component of Z-Score is defined as (X5=Net Sales/Total Assets).
This ratio measures the ability of the company's assets to generate sales.
This ratio is not included in the Z-Score of a private company.
The Z-Score model for Public industrial companies is: Z = 1.2 X1 + 1.4 X2
+ 3.3 X3 + 0.6 X4 + 1.0X5. A healthy public company has a Z >2.99; it is
in the grey zone if 1.81 < Z < 2.99; it is unhealthy if it has
a Z <1.81
The Z-Score model for Private industrial companies is: Z = 6.56 X1 + 3.26
X2 + 6.72X3 + 1.05X4. A healthy private company has a Z >2.60; it is in
the grey zone if 1.1 < Z < 2.59; it is unhealthy if it has a Z
<1.1.
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