I.

Liquidity Ratios

No Ratio Method of Computation Significance

1 Current Current Assets Measures short-term liquidity, the ability of a

Current Liabilities firm to meet needs for cash as they arise.

2 Quick or Current Assets - Inventory Measures short-term liquidity more rigorously

than the current ratio by eliminating inventory,
Acid-test Current Liabilities usually the least liquid current asset.

3 Cash Flow Measures short-term liquidity by considering as

Cash + Marketable Securities
cash resources (numerator) cash plus cash
Liquidity + Cash Flow from operating
equivalents plus cash flow from operating
activities
activities.
Current Liabilities
4 Average Net Accounts Receivable Indicates days required to convert receivables
into cash.
Collection Net Sales/365
Period
5 Days Inventory Inventory Indicates days required to sell inventory.
Held Average Daily Cost of Sales

6 Days Payable Accounts Payable Indicates days required to pay suppliers.

Outstanding Average Daily Cost of Sales

7 Cash conversion Indicates the days in the normal operating cycle

Average collection period +
or cash conversion cycle of a firm.
or net trade days inventory held - days
payable outstanding
cycle
8 Net working Current Assets Determines whether or not the company has
enough current assets to cover current liabilities.
ratio Short-term Liabilities
2017 Explanation
II. Activity Ratios

No Ratio Method of Computation

1 Accounts Receivable Net Sales

Turnover Net Accounts Receivable

2 Inventory Turnover Cost of Goods Sold

Inventories

3 Payables Turnover Cost of Goods Sold

Accounts Payable

4 Fixed Asset Turnover Net Sales

Net property, plant, and equipment

5 Total Asset Turnover Net Sales

Total Assets

6 Current Asset Net Sales

Turnover Current Assets
 Significance 2017 Explanation

Indicates how many times receivables are

collected during a year, on average.

Measures efficiency of the firm in managing

and selling inventory.

Measures efficiency of the firm in paying

suppliers.

Measures efficiency of the firm in managing

fixed assets.

Measures efficiency of the firm in managing all

assets.

Measures firm's ability of generating sales

through its current assets.
Explanation
III. Leverage Ratios

No Ratio Method of Computation

1 Debt Ratio Total Liabilities

Total Assets

2 Long-term Debt to Long-term Debt

Total Capitallization Long-term Debt + Stockholders'
Equity

3 Debt to Equity Total Liabilities

Stockholder's Equity

4 Financial Leverage Return on Equity

Index Adjusted Return on Assets

5 Times interest earned Operating profit

Interest expense

6 Cash interest Cash flow from operating

coverage activities + interest paid + taxes
paid
Interest paid
7 Fixed charge Operating profit + Lease
coverage payments
Interest expense + Lease
payments
8 Cash flow adequacy Cash flow from operating
activities

Capital expenditures + debt

repayments + dividends paid
 Significance 2017 Explanation

Shows proportion of all assets that are financed

with debt.

Measures the extent to which long-term debt is

used for permanent financing.

Measures debts relative to equity base.

Indicates if a firm is employing debt

successfully.

Measures how many times interest expense is

covered by operating earnings.

Measures how many times interest payments are

covered by cash flow from operating activities.

Measures coverage capability more broadly than

times interest earned by including operating
lease payments as a fixed expense.

Measures how many times capital expenditures,

debt repayments, and cash dividends are covered
by operating cash flow.
IV. Profitability Ratios

No Ratio Method of Computation

1 Gross profit margin Gross profit

Net sales

2 Operating profit Operating profit

margin Net sales

3 Effective tax rate Income taxes

Earnings before income taxes

4 Net profit margin Net profit

Net sales

5 Cash flow margin Cash flow from operating

activities
Net sales
6 Return on total assets Net earnings
Total assets

7 Cash return on assets Cash flow from operating

activities
Total assets
8 Return on total Net profit
equity Total Equity
 Significance 2017 Explanation

Measures profit generated after

consideration of cost of products sold.

Measures profit generated after

consideration of operating expenses.

Measures the percentage the company

recognizes as tax expense relative to income
before taxes.
Measures profit generated after
consideration of all expenses and revenues.

Measures the ability of the firm to generate

cash from sales.

Measures overall efficiency of firm in

managing assets and generating profits.

Measures the return on assets on a cash

basis.

Measures of how well a company uses

invetments to generate earnings growth.
 V. Market Ratios

No Ratio Method of Computation

1 Earning per common Net earnings

share Average common stock outstanding

2 Price to earnings Market price of common stock

Earning per share

3 Dividend payout Dividends per share

Earnings per share

4 Dividend yield Dividends per share

Market price of common stock

5 Price to book value Market price of common stock

Book Value
 Significance 2017 Explanation

Shows return to common stock shareholders

for each share owned.

Expresses a multiple that the stock market

places on a firm's earnings.

Shows percentage of earnings paid to

shareholders.

Shows the rate earned by shareholders from

dividends relative to current price of stock.

Indicates how much shareholders are

contributing/paying for a company's net assets.
 V. Firm Size

No Ratio Method of Computation Significance

1
2017 Explanation