Liquidity ratios

a. Current ratio: current assets / current liabilities

b. Quick acid: current assets-inventory / current liabilities

Measures the firm's ability in covering its short term obligations as they come due

Activity or asset management ratio:

a. Inventory turnover: COGS/ Ending inventory how many times the firm is

able to sell its inventory

b. Average collection period: A/R / average sales per day

c. Average payment period: AP / average purchase per day (% of COGS) /

365

d. Total Asset turnover: Net sales / total assets = 0.50x (this means that

every $1 of investment, you make 50 cents)

How efficient the firm is using its assets to generate sales revenue. (The

higher the ratio, the better)

Financial leverage

a. Debt Ratio: Total Liabilities/ Total Assets= 60%

means that 60% of my assets are financed by debt, and the other 40 is

financed by equity

b. Time interest earned ratio: EBIT/ Interest expense =20

How many times the firm is able to cover its interest expense using its

operating profit
 This means that I’m able to cover my IE 20 using my OP (the higher the

better, because it means that I’m financially capable of taking more loans in

the future)

Profitability

a. Gross Profit margin: Gross Profit/ sales

the percentage of $ sales remaining after paying the COGS

b. Operating profit margin: operating profit/ sales

Sales revenue remaining after paying the COGS and the operating

expenses

c. Net profit margin: Net profit after tax/ sales

% of $ sales after paying COGS, interest expenses, tax, Operating

expenses

d. Return on Assets:Net profit after tax/ total assets = 6.4%

How efficient the firm is using its assets to generate profit

Every $1 invested, 6.4% of it is profit

e. Return on equity: Net profit after tax/ total common stock equity (total

equity - preferred stock)

How efficient the firm is using its equity to generate profits (the higher the

better)

f. Earnings per share: Earnings available to common stockholders/ Number

of shares outstanding
 Dollar amount earned on behalf of each outstanding share of common

stock

Market ratios

a. Price earnings ratio: Market price per share of common stock/ Earnings per

share

Measures the amount that investors are willing to pay for each dollar of a

firm’s earnings

b. Market book ratio: Market Price/Share of Common Stock / Book

Value/Share of Common Stock