What's it: Collateral is a borrower's asset pledged when taking out a loan. They agreed to turn it over to the lender when they defaulted on the loan. For lenders, it aims to secure loan repayments and reduce the impact of a default.
Finance
Net Profit Margin: Formula, Calculation, Interpretation
What's it: Net profit margin is a profitability ratio to measure how much profit is left (in percent) after the company has covered all its costs, including interest expense and taxes. We calculate it by dividing net profit
Efficiency Ratio: Type, Formula, Interpretation
What's it: An efficiency ratio is a financial ratio to show us how well a company utilizes its assets in relation to its ability to generate revenue. Some examples include accounts payable turnover ratio, inventory turnover ratio, and
Activity Ratio: Types, Formulas, and Interpretations
What's it: Activity ratio is a financial ratio to measure how well a company manages its assets. We then relate it to revenue or expenses to pay suppliers. Some are useful for assessing a company's effectiveness in managing short-term
Cash Flow Ratios: Examples, Formulas, and Interpretations
What's it: Cash flow ratios are financial ratios calculated by comparing the metrics in the cash flow statement with other items in the financial statements. For example, cash from operations (CFO) is a commonly used metric.
Liquidity Ratio: Examples, Formulas, How to Calculate
What's it: The liquidity ratio is a financial ratio to measure a company's ability to meet its short-term obligations. Commonly used ratios are the current ratio, cash ratio, and quick ratio. Their calculations are relatively easy
Financial Ratios For Credit Rating Analysis
Financial ratios for credit rating analysis usually focus on answering the question, "how capable is the company generating sufficient cash flow to finance its obligations." Thus, it compares two metrics: its ability to generate cash and
Valuation Ratio: Formula And Its Interpretation
What's it: A valuation ratio is a financial ratio in which we relate a company's financial soundness to its market value. We use it to determine how attractive a company's stock is. To calculate a valuation ratio, we
Inventory Turnover Ratio: Formula, Calculation and How to Read It
What's it: Inventory turnover ratio is a financial ratio to show the number of times companies convert their inventory into sales during a given period. It is useful for evaluating management effectiveness in managing
Solvency Ratio: Formulas, Examples, and Calculations
What's it: The solvency ratio is a financial ratio to measure a company's ability to meet its long-term obligations. To calculate it, we divide the debt relative to the firm's capital or assets. Or, we compare a company's ability to
What are the Invoice Factoring Advantages and Disadvantages
The invoice factoring service has several advantages and disadvantages. Allowing the company to get cash immediately is its main advantage. However, using the services of a factoring company requires the company to spend money to pay
Current Ratio: How to Calculate and Interpret
What's it: The current ratio is a financial ratio to measure liquidity by considering all short-term assets and liabilities. It is the loosest ratio among other liquidity ratios such as quick and cash ratios. We get the
Invoice Factoring: Meaning, Importance, How it Works
What's it: Invoice factoring is a financing arrangement in which a company sells its invoices receivable to a finance company (called a factor or factoring company) in exchange for liquidity. The factoring company will pay cash from
Quick Ratio: Formula, Calculation, Interpretation
What's it: The quick ratio is a financial ratio to measure liquidity by excluding some less liquid accounts such as inventory. It tells us how much more liquid current assets can cover short-term liabilities. Inventories and
Working Capital Turnover: Formula, Calculation, and Interpretation
What's it: Working capital turnover is a financial ratio to measure how efficiently companies use their working capital to generate revenue. We calculate it by dividing revenue by the average working capital. A higher ratio
Days Payable Outstanding: How to Calculate and Interpret it
What's it: Days payable outstanding (DPO) is a financial ratio showing how many days on average it takes a company to pay its suppliers. We calculate it by dividing the number of days in a year by the accounts payable