What is acid test ratio and ROA ratio?
Investors calculate the acid test ratio, also known as the quick ratio or the pounce ratio. This ratio excludes inventory and prepaid expenses, which the current ratio includes, and it limits assets to cash and items that the business can quickly convert to cash. This limited category of assets is known as quick or liquid assets. The acid-text ratio is calculated by dividing the liquid assets by the total current liabilities.
This ratio is also known as the pounce ratio to emphasize that you're calculating for a worst-case scenario, where the business's creditors could pounce on the business and demand quick payment of the business's liabilities. Short term creditors do not have the right to demand immediate payment, except in unusual circumstances. This ratio is a conservative way to look at a business's capability to pay its short-term liabilities.
One factor that affects the bottom-line profitability of a business is
whether it uses debt to its advantage. A business may realize a financial leverage gain, meaning it earns more profit on the money it has borrowed than the interest paid for the use of the borrowed money. A good part of a business's net income for the year may be due to financial leverage. The ROA ratio is determined by dividing the earnings before interest and income tax (EBIT) by the net operating assets.
An investor compares the ROA with the interest rate at which the corporation borrowed money. If a business's ROA is 14 percent and the interest rate on its debt is 8 percent, the business's net gain on its capital is 6 percent more than what it's paying in interest.
ROA is a useful ratio for interpreting profit performance, aside from determining financial gain or loss. ROA is called a capital utilization test that measures how profit before interest and income tax was earned on the total capital employed by the business.
Terms of Use for this Private Label Article
Possibly Related PLR Articles:
Growing Online Dating Relationships
Just like regular real-world relationships, online relationships need tending, to grow over time. Here are some quick growing tips.
1. Take time and make time. Does your online date get in touch with you regularly? Do you do the same?...read more
After school safety - tips and reminders
When parents send their children for after school programs, they take it
for granted that the child is safe. But since the number of children
participating in these activities has increased, it is necessary to look
into safety issues.
...read more
Get Involved in your Child's Activities, Hobbies and School
It's probably no secret that children who have involved parents are more happy, healthy, and well-adjusted and excel at their educational and extracurricular pursuits. It can increase their cognitive development, keeps them motivated, strengthens...read more
Keep a Detailed Home Maintenance and Renovation Diary
Just as it's important for you to keep detailed records of your home business, your bills, income tax information or medical history, so too is it imperative that you keep a detailed records of all maintenance you perform on your home. After all,...read more
Exercise Balls
Exercise balls are one of the most innovative ways
to exercise. These little balls will catch every
one's fancy due to their shape and very attractive
colors. The real benefit of these balls, which
were introduced by a group of Swiss...read more
Finding Hip Hop Mix Podcasts
Many music podcasts are available online for
downloading; if one wanted to find, for instance, a hip
hop mix podcast, there are a few sites available to help.
The first possibility would be to go directly to a site
which creates one and...read more
Adware Spyware Remover from Trend Micro systems
Computers are composed of two things namely the hardware and the software. Should something infect the software such as a virus or spyware, the person will soon lose sensitive information or at worse have to spend a lot of money to have it repaired....read more
Petersons Sports Scholarship and College Athletic Program: Getting your Way towards becoming a College-Bound Student
Supposedly you are a high school athlete who want to continue his sports career and has high hopes in entering the varsity when you go to college. You are confident enough that you will be able to attract the attention of college varsity coaches who...read more
Grooming Your Golden Retriever
Grooming your Golden Retriever is a never ending process. The entire process should be down once or twice a week, and will take you around a ½ an hour of time. Brushing your dog while he is shedding will help to control shedding quite a bit. ...read more
Google PPC: Content or Search?
When advertising with pay per click Google gives the advertiser two broad options. Advertising in search results, advertising in websites content or indeed many choose to do both. Advertising in search means that results are displayed in Google...read more