Working capital = Current Asset – Current Liabilities

LIQUIDITY RATIOS FORMULA

Current Ratio Current Assets/Current Liabilities
Quick Ratio (Cash + Marketable Securities + Net Current Receivables) / Current Liabilities
AR Turnover Ratio Net Credit Sales / Average Accounts Receivable
Ave. A/R = (beginning + ending receivables) /2
Age of A/R turnover in days = 365 / AR Turnover Ratio
Inventory Turnover Ratio COGS / Average Inventory
Average Age of Inventory = 365 / Inventory Turnover

Liquidity Ratios are used to assess the short- term debt-paying ability of a company.

 current ratio measures the ability of the firm to meet its short-term obligations.
 quick (acid-test) ratio excludes inventory, which is generally the least liquid current asset.
 A variant of the receivable turnover ratio is to convert it to an Average collection period in terms
of days. The objective is to assess the efficiency in collecting receivable and in the management
of credit. A low turnover ratio may suggest a need to modify credit and collection policies to
speed up the conversion of receivables to cash.
 Inventory turn over is a measure of the number of times the average level of inventory is sold
during a year. A low turnover ratio may signal the presence of too much inventory or sluggish
sales
SOLVENCY RATIOS FORMULA
Debt Ratio Total Liabilities / Total Assets
Times-interest-earned ratio Income from operation / Interest expense

Solvency ratios measure the ability of a company to survive over a long period of time.

 Debt ratio - indicates the proportion of assets financed with debt.

 Times-interest-earned ratio - measures the number of times operating income can cover interest
expense.
PROFITABILITY RATIOS FORMULA
Profit Margin Net Income/ Net Sales
Asset turnover Net Sales / Average Assets
Return on Asset Net Income / Average Assets
Return on common stockholders' equity Net Income - Preferred Dividends
/ Average common stockholders' equity
Earnings per share (EPS) Net Income - Preferred Dividends
/ Weighted average common shares outstanding
Price-earnings Ratio Market price per of stock / Earnings per share
Payout Ratio Cash Dividends / Net Income

Profitability Ratios - Measure the income or operating success of a company for a given period of time.

◆Income, or the lack of it, affects the company’s ability to obtain debt and equity financing, liquidity
position, and the ability to grow.
 Profit margin - Measures net income generated by each dollar of sales
 Asset turnover - Measures how efficients assets are used to generate sales.
 Return on assets - Measures overall profitability of assets
 Return on common stockholders’ equity - Measures profitability of owners investment
 Earning per share - Measures net income earned on each share of common stock
 Price earning ratio - Measures the ratio of the market price per share to earnings per share
 Payout ratio - Measures percentage of carmines distributed in the form of cash dividends