Interest Coverage: If a company borrows money in the form of debt, it most likely incurs interest charges on it.

The interest coverage ratio measures a company’s ability to meet its interest obligations with income earned from the firm’s primary source of business. Again, h igher interest coverage ratios are typically better, and interest coverage close to or less than one means the company has some serious difficulty paying its interest.

Gross Margin: This is simply the amount of each dollar of sales that a company keeps in the form of gross profit, percentage-wise. The higher the gross margin, the more of a premium a company charges for its goods or services, or the lower its costs. Companies in different industries tend to have vastly different values.

Operating Margin: It is a much more complete and accurate indicator of a company’s performance than the gross margin, as it accounts for the cost of sales and other administrative costs such as marketing and overhead expenses, valuing how much a company makes or loses from its primary business per dollar of sales.

Net Margin: This considers how much of the company’s revenue it keeps when all expenses or other forms of income have been considered, regardless of their nature. However, this ratio often contains “noise” which is not reflective of the company’s core business performance. If this value is greater than 15%, the company is performing superbly.

Return on Equity: It measures a company’s return on its investment by shareholders. This is also stated in percentage terms and a value exceeding 15% is prime.

Inventory Turnover: This illustrates how well a company manages its inventory levels. Too low, and a company may be either overstocking or struggling with selling products to customers. All else equal, higher inventory turnover is better. N.B. This is a different method to that learnt in IB1240 Intro to Financial Accounting.

Accounts Receivable Turnover: It measures the effectiveness of a company’s credit policies. If this is too low, the company is granting credit too generously or having difficulty collecting from its customers. This may be either because it has expended too much with bad debt or its provision for doubtful debts is too high. At any rate this is critical for liquidity.

Any value equal to or less than one may mean a company is having great liquidity issues. firms with a greater value are considered to be more risky. The higher this value. with all else equal. Gearing Ratio: This ratio measures how much of the company is financed by its debt-holders relative to the owners. due to their greater risk of defaulting. values below one are symptomatic of illiquidity in a business. especially if this is in addition to an already outstanding long-term debt. divided by the company’s enterprise value (market capitalization and long-term debt – cash). High values suggest a firm isn’t receiving very favourable terms from its suppliers. . A company with a lot of debt will have a high value and vice-versa. the better. Current Ratio: The most basic liquidity test. Asset Turnover: It is a catch-all efficiency ratio that highlights how effective management has used both short-term and long-term assets for the creation of wealth. As above. As such. This is especially true if in addition to low liquidity ratio results. lower values are preferred. Quick Ratio: This is a tougher test of liquidity as it excludes inventory and pre-paid expenses. Cash Ratio: This is the most conservative liquidity ratio as it measures only using the firm’s available cash and short-term securities to pay its short-term obligations. Cash Return: This is simply free cash flow (cash from operations – capital expenditures) in addition to net interest expense (interest expense – interest income).Accounts Payable Turnover: This measures a company’s ability to manage its own outstanding bills. it measures a firm’s ability to meet its current liabilities with its current asses. As such.