Defining the Measurement

Levels, Namely, Liquidity,

Solvency, Stability, and
Profitability
 Learning Competency:

Define the measurement

levels, namely, liquidity,
solvency, stability and
profitability.
 I. LIQUIDITY RATIOS
Calculates the
company’s current or
quick assets against its
outstanding liabilities
 Types of Liquidity Ratios

1. Current Ratio
 It measures the ability of the business to pay its
short-term obligations as they fall due.

Current ratio = Current Assets

Current Liabilities
 2. Quick Ratio

 Also known as acid test ratio, measures immediate

liquidity with the ability to pay current liabilities
with the most liquid assets.

Quick Ratio = Cash + Short term investments + Trade receivables

Current Liabilities
 II. EFFICIENCY RATIO OR TURNOVER
RATIOS

Measure the management’s

efficiency in utilizing the assets
of the company.
 Types of Efficiency Ratios

1. Receivable Turnover
Measures the efficiency to collect the
amount due from credit customers.

Receivable = Net Credit Sales

Turnover Average Trade Sales
 2. Average Collection Period

 Also called day’s sales outstanding, is the

approximate number of days it takes a business to
collect its receivables from credit or account sales.

Average Collection = 360 days

Period Trade receivable turnover
 3. Inventory Turnover

Measures the number of times a company’s

inventory is sold and replaced during the
year.

Inventory = Cost of Goods Sold

Turnover Average Inventory
 III. SOLVENCY RATIOS

Otherwise called leverage ratios,

measure a company’s liability to pay its
maturing long-term debts while
sustaining operations indefinitely.
 Types of Solvency Ratios

1. Debt Ratio
 Otherwise known as the debt to assets ratio, measures
business liabilities as a percentage of total assets.

Debt Ratio = Total liabilities

Total Assets
 2. Equity Ratio
Measures the percentage of total assets
financed by the owner’s investment.

Equity Ratio = Total Equity

Total Assets
 3. Debt to Equity Ratio

 Otherwise known as financial leverage ratio,

measures the financing provided by the creditors
against those provided by the owner.

Debt to Equity Ratio = Total Liabilities

Total Equity
 IV. PROFITABILITY RATIOS

Measures a company’s overall

efficiency and performance based on
its ability to generate profit from
operations relative to its available
assets and resources.
 Types of Profitability Ratio

1. Gross Profit Ratio

 Otherwise called gross margin ratio, measures the
percentage of peso sales earned after deducting cost of
goods sold.

Gross Profit Ratio = Gross Profit

Net Sales
 2. Operating Profit Margin

Measures the percentage of income earned

after deducting the cost of sales and the
operating expenses.

Operating Profit = Operating Income

Margin Net Sales
 3. Net Profit Margin

 Otherwiseknown as return on sales, measures the

percentage of net income earned from net sales after all
other income has been added and all operating expenses
and other expenses including income taxes have been paid.

Net Profit = Net income

Margin Net Sales
 4. Return on Assets

 Otherwisecalled return on investment, measures

the company’s efficiency in using its level of
investment in assets in order to generate income.

Return on Assets = Net income

Average total assets
 5. Return on Equity

Measures the amount of net income earned in

relation to stockholders’ equity.

Return on Equity = Net income

Stockholders’ Equity