What is acid test ratio and ratio ROA?
Investors, calculate the ratio of acid test, also known as the quick ratio or pounce ratio. This spending ratio of stocks and prepaid, including report current, exclude and assets limited to cash and items that the company can turn quickly into cash. This limited class of assets is known as fast or liquid assets. The relationship between acid-text is calculated by dividing the liquid assets by total liabilities.
This ratio is also known as ratio pounce to stress that you for a worst-case scenario, where the company of calculates that the creditors can pounce on the company and the issue of the rapid payment of the obligations of the company. Short-term creditors did not have the right to demand immediate payment, except in exceptional circumstances. This ratio is a conservative way to look at the ability of a company to pay its obligations in the short term.
A factor which affects the net profitability of a company is if the debt in his favour. A company can make a profit of financial leverage, which means that it deserves more profit than the interest paid for the use of the borrowed the borrowed money. A large part of the net revenue of the company for the year can be caused by financial leverage. The ROA ratio is determined by the income of the share of income before interest and taxes (EBIT) by the net of exploitation active.
An investor compares the ROA with the interest rate at which the company borrowed money. If a company ROA 14 percent and the interest on the debt 8%, the net profit of the company in the capital is 6 percent more than what it will pay in interest.
ROA is a useful relationship to interpret profit performance, outside the definition of financial gain or loss. ROA is called a capital use test that measures how profit before interest and tax on the income was earned on total equity in the service of society.
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