Current Ratio = Current Assets ÷ Current Liabilities

Evaluates the ability of a company to pay short-term obligations using current

assets (cash, marketable securities, current receivables, inventory, and
prepayments).
Cash Ratio = (Cash + Marketable Securities) ÷ Current Liabilities

Acid Test Ratio = Quick Assets ÷ Current Liabilities

Also known as "quick ratio", it measures the ability of a company to pay short-
term obligations using the more liquid types of current or quick assets" (cash,
marketable securities, and current receivables).

Net Working Capital = Current Assets - Current Liabilities

Determines if a company can meet its current obligations with its current assets;
and how much excess or deficiency there is.

Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable

Measures the efficiency of extending credit and collecting the same.
A high ratio implies efficient credit and collection process.

Days Sales Outstanding = 360 Days ÷ Receivable Turnover

Also known as "receivable turnover in days", "collection period".
It measures the average number of days it takes a company to collect receivable.
The shorter the DSO, the better

Inventory Turnover = Cost of Sales ÷ Average Inventory

Represents the number of times inventory is sold and replaced.
A high ratio indicates that the company is efficient in managing its
Inventories.

Debt Ratio = Total Liabilities ÷ Total Assets

Measures the portion of company assets that is financed by debt.
Equity Ratio = Total Equity ÷ Total Assets
Determines the portion of total assets provided by equity (i.e. owners' contributions
and the company's accumulated profits).
The reciprocal of equity ratio is known as equity multiplier, which is equal to total
assets divided by total equity.

Times Interest Earned = EBIT ÷ Interest Expense

Measures the number of times interest expense is converted to income, and if the
company can pay its interest expense using the profits generated. EBIT is earnings
before interest and taxes.

TREND ANALYSIS: An analysis of a firm’s financial ratios over time;

Used to estimate the likelihood of improvement or decline in its
financial condition.

Common size analysis, also referred as vertical analysis, is a tool that

financial managers use to analyze financial statements. It evaluates
financial statements by expressing each line item as a percentage of the
base amount for that period.

Percentage Change Analysis

In this type of analysis, growth rates are calculated for all income
statement items and balance sheet accounts.
Current Year Figure−Base Year Figure
Percentage change= x 100
Base Year Figure

DuPont Equation:
It shows the relationships among asset management, debt management,
and profitability ratios.
ROE=Profit Margin X Total Asset Turnover X Equity Multiplier

Net income Sales Total Assets

ROE= X X
Sales Total Assets Total Common Equity

Simple Interest Occurs when interest is not earned on interest

Compound Interest Occurs when interest is earned on prior periods’

interest. Most financial contracts are based on compound interest

Compounding: The process of going FV from PV is called

compounding

Discounting: is process of finding PV of a Cash flow.

Annuity: An Annuity represents a series of equal payments (or receipts)

occurring over a specified number of equidistant periods.

• Ordinary Annuity: Payments or receipts occur at the end of each

period.
• Annuity Due: Payments or receipts occur at the beginning of each
period.

 Independent projects :
  A project is said to be independent if accepting/rejecting one
project has no impact on the accept/reject decision for the
other project.
 Mutually exclusive projects:

 A project is said to be mutually exclusive if accepting one project

implies rejecting another
– If company have plenty amount of investment and resources,
projects may be independent as company may have resources
to fund all the projects
– - If company do not have sufficient funds and resources, this
may warrant that only best project can be selected for
investment, thus rejecting other projects.
 The decision rule is:

If the projects are independent, select all the projects with Net
present value of greater than or equal to zero.

If the projects are mutually exclusive, select the project with the
higher Net present value than other, on the condition that NPV is
still greater than or equal to zero.

Advantages of NPV:

Focuses on cash flows, not accounting earnings.

Makes appropriate adjustment for time value of money.

Can properly account for risk differences between projects.

Disadvantages of NPV:

Complex to calculate and explain, Sensitive to discount rates.

Based on estimated cashflows, which may be different from actual ones.