FORMULA SIGNIFICANCE

The current ratio can provide

2b investors and analysts with

clues about the efficiency of a
Current Ratio company’s operating cycle, or
Current Assets ÷ its ability to monetize its
Current Liabilities products. The higher the ratio,
the more able a company is to
pay off its obligations.
The quick ratio measures the
dollar amount of liquid
assets available for each
Quick Assets Quick Assets / dollar of current liabilities.
Ratio Current Liabilities Thus, a quick ratio of 1.5
means that a company has
$1.50 of liquid assets
available to cover each $1 of
current liabilities.
The calculation shows how

2c effectively a company is
producing its core products
Return on Sales and services and how its
Net Income (before management team is running
interest and tax) / the business. Therefore, ROS
Sales is used as an indicator of both
efficiency and profitability.
Gross profit margin is used to
compare business models
Gross Profit Revenue - COGS / with competitors. More
Margin Revenue efficient or higher premium
companies see higher profit
margins.
The debt/equity ratio
Liabilities / measures a company’s debt
Equity Ratio Shareholders' relative to the total value of
Equity its stock; it is most often used
to gauge the extent to which
a company is taking on debt
 as a means
of leveraging (attempting to
increase its value by using
borrowed money to fund
various projects). A high
debt/equity ratio generally
means that a company has
been aggressive in financing
its growth with debt. 
The debt to equity ratio is a
financial, liquidity ratio that
compares a company’s total

2a
debt to total equity. The debt
to equity ratio shows the
percentage of company
Debt to Equity financing that comes from
Ratio creditors and investors. A
Total Liabilities / higher debt to equity ratio
Total Equity indicates that more creditor
financing (bank loans) is used
than investor financing
(shareholders).
In essence, the receivables
turnover ratio indicates the
efficiency with which a firm
collects on the credit it issues
to customers. Firms that
Receivable Net Credit Sales / maintain accounts
Turnover Average Accounts receivables are indirectly
Receivable extending interest-free loans
to their clients since accounts
receivable is money owed
without interest. 
As a management tool,
Age of Accounts accounts receivable aging
Receivable Receivable x 365 / may indicate that certain
Sales revenue customers are not good
credit risks, and may reveal
 whether the company should
keep doing business with
customers that are
chronically late payers.
The inventory turnover ratio is
Cost of Goods Sold one of the best indicators of
Inventory ÷ Average how efficiently a company is
Turnover Inventory Or Sales turning its inventory into
÷ Inventory sales. Even better, the days
inventory ratio puts it into a
daily context.
DSI significantly changes
between industries and it is
important to compare it
Age of Inventory (Average Inventory against peer companies.
÷ Cost of Goods Businesses that sell
Sold) x 365 perishable products like
supermarkets or groceries
stores have lower inventory
days than business that sell
furniture or appliances.