Current Ratio

The current ratio is measured by dividing a company's current assets by its

current liabilities. This financial metric measures the ability of a company to
pay off its short-term obligations. A current ratio greater than one indicates
that a company can cover its short-term debt with its most liquid assets. To
an investor, the current ratio gauges the liquidity and short-term stability of an
organization during the potential seasonal fluctuations common to retail.

Quick Ratio
The quick ratio is calculated by dividing a company's cash and accounts
receivable by its current liabilities. This ratio is similar to the current ratio, but
the quick ratio limits the type of assets that cover the liabilities. For this
reason, the quick ratio is a more accurate measurement of the immediate
liquidity of a company. If a company is forced to liquidate its assets to pay its
bills, companies with a higher quick ratio are forced to sell fewer assets. From
an investor's standpoint, the quick ratio provides insight into the stability of the
immediate liquidity position of a company.

Gross Profit Margin

The gross profit margin is a profitability ratio that is calculated in two steps.
First, the gross profit is calculated by subtracting a company's cost of goods
sold (COGS) from its net revenue and then dividing the gross profit by net
sales. This metric is insightful to management as well as investors concerning
the markup earned on products. From an investor's standpoint, higher gross
profit margins are preferable since a piece of inventory generates more
revenue when it is sold for a higher gross profit. Because all items in a retail
company are inventory items, the gross profit margin relates to every item in a
retail store.

 
ROA is particularly important for retail companies because they rely on
inventory to generate sales.

Inventory Turnover
Calculated by dividing net sales for a period by the average inventory balance
for the same period, inventory turnover is a measurement of the efficiency of
inventory management. Retail companies have inventory on hand to secure
and protect. Additionally, older inventory may become obsolete. For this
reason, higher inventory turnover is favorable for management as well as
investors. A low inventory turnover indicates a company is inefficiently holding
too much inventory or not achieving sufficient sales. Alternatively, an inventory
turnover ratio can be too high. For example, a large ratio may indicate a
company is efficiently ordering inventory but not receiving ordering discounts.
Return on Assets
Return on assets (ROA) is a profitability measurement that gauges how well a
company is using its assets to generate revenue. This measure is especially
important for a retail company, which relies on its inventory to generate sales.
The financial ratio is calculated by dividing a company's total earnings by its
total assets. An investor can compare a retail company's ROA to industry
averages to understand how effectively the company is pricing its goods and
turning over its inventory. For example, according to CSIMarket.com, the retail
apparel industry reported an average ROA of 33% in the third quarter of 2019.
If a company in this industry calculated a metric of 15%, it may be carrying too
much inventory or not charging high enough prices compared to its
competitors.

Interest Coverage Ratio

The interest coverage ratio is calculated by dividing earnings before interest
and taxes (EBIT) by the average interest expense. A retail company may be
charged an interest expense for the rent or lease of goods, equipment,
buildings, or other items necessary for operations. The interest coverage ratio
determines how well a company can cover the interest it owes for a period. An
investor can use this ratio to determine the stability of a company as well as
how well it can cover its interest charges.

EBIT Margin
The EBIT margin measures the ratio of EBIT to the net revenue earned for a
period. A company can use this financial ratio to determine the profitability of
goods sold without having to factor in expenses that do not directly affect the
product. Although the EBIT margin accounts for administrative and sales
expenses, it removes a few expenditures that may skew the perception of the
profitability of a good. From an investor's standpoint, the EBIT margin gives an
indication of a company’s ability to earn revenue.