Formula How Expressed Meaning 1. Liquidity Ratios Current ratio Quick (acid test) ratio Inventory to net working capital Cash ratio 2. Profitability Ratios Net profit margin Gross profit margin Return on investment (ROD) Return on equity (ROE) Earnings per share (EPS) 3. Activity Ratios Inventory turnover Days of inventory Net working capital turnover Asset turnover Current assets Current liabilities Current asset — Inventory ‘Current Habilities Inventory Current assets ~ Current Habilities Cash + Cash equivalents (Current liabilities Net profit after taxes Net sales Sales ~ Cost of goods sold Net sales Net profit after taxes Total assets Net profit after taxes shareholders” equity Net profit after taxes — Preferred stock diviclends “Average number of common shares Net sales Inventory Inventory Cost of goods sold + 365 Net sales Net working capital Sales Total assets Decimal Decimal Decimal Decimal Percentage Percentage Percentage Percentage Dollars per share Decimal Days Decimal Decimal A short-term indicator of the com- pany's ability to pay its short-term lia- bilities from short-term assets; how much of current assets are available to cover each dollar of current liabilities ‘Measures the company's ability to pay off ts short-term obligations from. current assets, excluding inventories. A measure of inventory balance; ‘measures the extent to which the cushion of excess current assets over current liabilities may be threatened by unfavorable changes in inventory. ‘Measures the extent to which the company’s capital is in cash or cash equivalents; shows how much of the current obligations can be paid from. cash or near-cash assets. Shows how much after-tax profits are generated by each dollar of sales Indicates the total margin available to cover other expenses beyond cost of goods sold, and still yield a profit. ‘Measures therate of return on the total assets utilized in the company: amea- sure of management’ efficiency. it shows the return onall the assets under its con- trol regardless of source of financing. ‘Measures the rate of return on the book value of shareholkclers’ total investment in the company. Shows the after-tax earnings gener- ated for each share of common stock. ‘Measures the number of times that average inventory of finished goods was tured over or sold during a period of time, usually a year. ‘Measures the number of one day's, worth of inventory that a company has on handat any given time. ‘Measures how effectively the net work- ingcapital is used to generate sales ‘Measures the utlization of all the com- pany’s assets, measureshow man sales are generatedlby each dollar of assets,Formula How Expressed — Meaning Fixed asset turnover Sales Decimal Measures the utilization of the com- Fixed assets pany’s fixed assets (Le, plant and equip- ‘ment); measures how many sales are generated by each dollar of fixed assets, Average collection period Accounts receivable Days Indicates the average length of timein Sales for year + 385 days that a company must wait to col- lect 2 sale after making it; may be compared to the credit terms offered by the company to its customers Accountsrecetvable tumover Annual credit sales Decimal Indicates the number of times that ‘Accounts receivable accounts recewable are cycled during the period (ustally a year), Accounts payable period Accounts payable Days Indicates the average length of timein Sales for year + 365 days that the company takes to pay its ‘ credit purchases. 4. Leverage Ratios Debt to asset ratio Total debt Percentage Measures the extent to which bor Total assets rowed funds have been used to finance the company’sassets. Debt to equity ratio Total debt Percentage Measures the funds provided by cred Shareholders’ equity itors versus the funds provided by owners, Long-term debt to capital structure Long-term debt Percentage Measures the long-term component Shareholders equity of capital structure Times interest earned Profit before taxes + Decimal Indicates the ability of the company Interest charges to meet its annual interest costs. Interest charges Coverage of fixed charges Profit before taxes + Decimal A measure of the company's ability to Interest charges + meet all of its fixed-charge Lease charges obligations. Interest charges + Lease obligations Current liabilities to equity Current liabilities Percentage Measures the short-term financing Shareholders’ equity portion versus that provided by owners. 5. Other Ratios Price/earnings ratio Market price per share Decimal Shows the current market's evaluation Earnings per share of astock, based on its earnings shows how much the investor is will- ing to pay for each dollar of earnings Divided payout ratio Annual dividends pershare Percentage Indicates the percentage of profit that “Annual earnings per share is pald out as dividends. Dividend yield on. Annual dividends pershare Percentage Indicates the dividend rate of return common stack Current market price per share to common shareholders at thecur- rent market price.