Liquidity Ratios: Ratios that measure a firm's ability to meet its short-term financial

obligations on time.
1. Current Ratio:- Current Assets/current liabilities
Indicator of short-term debt-paying ability. The higher the ratio, the more liquid the company.
Acceptance criteria is 1:1
2. Quik Ratio/ Acid Test Ratio:- Current Assets - (inventory + prepaid expenses)
/current liabilities
A stricter indication of a company's financial strength (or weakness).. This ratio provides
information regarding the firm's liquidity and ability to meet its obligations. Acceptance criteria
is 0.5:1.
3. Cash Ratio:- Cash+ marketable securities/ Current liabilities’
Absolute availability of Cash to meet the short term dues.
4. Net Working Capital:- Current Assets-current liabilities
It is more a measure of cash flow than a ratio.
Efficiency Ratios: Ratios that measure how effectively a firm is managing its assets.
1. Account Receivable Turnover:- Net Sales/Account Receivable
This ratio measures the number of times receivables turn over in a year relative to sales.
2. Average Collection Period:- Days in year / Account Receivable Turnover
Ratio tells how many days on average it takes to collect sales in form of cash.
3. Account Payable Turnover:- Net Purchases/Account Payables
This measurement of liquidity measures the number This me account payables turnover in one
year and Account Payable Turnover can provide numerous insights into the operations of a
company including how well they are working with vendors in its supply chain.
4. Payment Period:- Days in year / Account Payable Turnover
Ratio is utilized to derive the number of days payable which provides a measurement of the
length of time between the purchase on account and the time the account is settled
5. Inventory Turnover:- Cost of goods sales / Inventory
The ratio of cost of goods sold to inventory, which measures the speed at which inventory is
produced and sold. Low turnover is an unhealthy sign, indicating excess stocks and/or poor sales.
6. Conversion Period:- Days in year / Inventory Turnover
It measures how long the company holds inventory before it is sold.
 7. Operating Cycle:- Collection Period + Conversion Period
The operating cycle is the time to acquire or to manufacture inventory, sell the product and
collect the cash. The operating cycle is usually less than one year for most industries.

8. Cash conversion Cycle :- Collection Period + Conversion Period- Payment Period

The amount of time expressed in number of days required to sell inventory and collect accounts
receivable less the number of days credit is extended by suppliers.
9. Asset Turnover:- Sales/Total Assets
Indicates the efficiency with which the firm assets to generate sales

Leverage Ratios: The more debt a firm a firm uses in relation to its total assets, the greater
the firm's fines leverage. Financial leverage refers to the magnification of risk and return
introduced through the use of fixols financing such as debt (and preferred stock). The more
fixed-cost debt, or financial leverage, a firm uses t greater will be its risk and its expected
return.
1. Debt Ratio:- Total Liabilities/ Total Assets
2. Equity Ratio:- Total Equity /Total Assets
3. Debt To equity ratio :- Total Liabilities/ Total Equity
This ratio shows the capital contribution relationship between creditors and owners. A measure
of a firm's ability to meet its fixe obligations
4. Interest Coverage Ratio :- operating income/Annual interest expenses
A measure of a firm ability to meet its fixed charge obligations.

Profitability Ratios: Show the effect of liquidity, asset management, and debt management
on operating y They focus on the profitability of the firm. Profit margins measure
performance with relation to sales return ratios measure performance relative to some
measure of size of the investment.
1. Gross Profit Margin:- Gross Profit/Net Sales
The gross margin is the relationship between sale and the cost of product sold. It is an accurate
measurement in terms of the company's ability control costs of goods sold.
2. Operating profit margin:- EBIT/Net Sales
The operating profit margin measures over all operating efficiency. It incorporates all expenses
associated with operations of the business.
3. Net Profit Margin:- Net Income/Net Sales
Measures the percentage of each sales ef remaining after all costs and expenses, incl interest and
taxes, have been deducted.
4. Return on equity :- Net Income-Preferred Dividends/Average Equity
Measures the return earned on the owners" (com stockholders') investment in the firm.
5. Return on Assets:- Net Income/ Total Assets
Measure the percentage of each sales determining after all costs and expenses including interest
and taxes have been deducted.
6. Operating Efficiency:- Operating expenses/Net sales
How much operating expenses incurred to generated sales for business.
Market Ratios: Relate the firm's stock price to its earnings and book value.
1. Earning Per Share:- Earnings available to common stockholders/number of shares
outstanding
Ratio relates the earnings generated by the business and available to shareholders, during a
period to no. of shares issue.
2. Price/Earnings (P/E) Ratios:- Market Price of share/Earning per share
Shows the "multiple" of earnings at which sells. Higher "multiple" means investors have high
expectations for future growth, and have bid up stock price.
3. Market/Book ratio:- Total common stock equity/ number of shares outstanding
The ratio of a stock's market price to its books available An indication of how investors regard
the company.
4. Dividend yield ratio:- Dividend Per Share/ Market price of share
Relates the cash return form a share to its current market value .This can help investors to asset
the cash return on their investment in the business.
5. Dividend Payout Ratio:- Dividend per share/ Earning Per Share
Provides an idea of how well earnings support dividend payments.
6. Market Value Added:- Market value of Share* – Total Common equity**

Market value of share = Number of Shares outstanding x Share Market price

 ** Total Common Equity = Total Equity – Preferred Shares

7. Economic Value Added:- EBIT(1-Tax rate) – (total investment in operating capital)

(WACC)

8. Free Cash Flow:- Net Income – Net Investment in Operating Capital*

 Net Investment in operating Capital is equal to difference between current year’s

operating capital and previous year’s capital
 To calculate the operating capital of any year use balances of this year’s (Current
asset –current liabilities) + fixed asset