¶ … company's liquidity, we will be using two significant financial ratios, the current ratio and the quick ratio.
The current ratio is calculated by dividing the current assets total value by the current liabilities total value. In this case, the current ratio is equal to Current Ratio = Current Assets/Current Liabilities = 1.38 (2004)
Current Ratio = Current Assets/Current Liabilities = 1.41 (2003)
The current ratio represents a measure of the company's shot term liability. In this sense, a current ratio value that is below 1 means that the company is not able to cover its short-term liabilities with its short-term earnings. This is obviously not the case for McKesson and, additionally, the company's current ratio has improved from 2003 to 2004.
The quick ratio is calculated by subtracting the overall inventory value from the current assets value and dividing it by the total current liabilities value. In this case, the quick ratio is equal to 0.66. Corroborated with the result obtained for the current ratio, we may assert that McKesson has a comfortable position in what its short-term solvability is concerned.
In order to evaluate the company's asset management, we will be using the inventory turnover and the total-assets turnover ratios. The inventory turnover ratio is calculated by dividing the net revenues by the overall inventory value. In this case,
Inventory Turnover = 69,506,100/6,735,100 = 10.3 times
It would have been helpful to have an average inventory turnover for the industry in order to be able to have a reasonable comparison. In its absence, we may assert that the high value obtained represents a consistent indicator that the company does not hold a stock surplus and that it is using its inventory effectively.
The total-assets turnover is equal to the net revenues divided by the total assets. In McKesson's case, this means that the total-assets turnover is equal to 4.3 times. The overall figure means that the company is generating enough sales as compared to its overall asset use. This financial ratio aims to prove a good inventory management for the company.
In terms of profitability ratios, we will be calculating the profit margin on sales and the return on total assets. The former is calculated by dividing the Net Revenue after tax by the Net Sales.
Profit Margin on Sales = Net Income after Tax/Net Sales = 0.9%
Return on Total Assets = Net Income after Tax/Total Assets = 6.8%
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