KINDS OF FINANCIAL RATIOS

1. LIQUIDITY RATIOS 2. LEVERAGE RATIOS 3. ACTIVITY RATIOS 4. PROFITABILITY RATIOS

5. MARKET TESTS

 1.

LIQUIDITY RATIOS

TO MEASURE THE ABILITY OF THE FIRM TO MEET ITS MATURING OBLIGATIONS

1.1 CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITIES

CURRENT ASSETS INCLUDE

CASH, MARKETABLE SECURITIES, ACCOUNTS RECEIVABLES AND INVENTORIES

CURRENT LIABILITIES INCLUDE

ACCOUNTS PAYABLE, SHORT-TERM NOTES PAYABLE, INCOME TAXES PAYABLE AND ACCRUED EXPENSES, SUCH AS WAGES - CURRENT RATIOS MEASURES SHORT-TERM SOLVENCY. - IT INDICATES THE EXTENT TO WHICH THE CLAIMS OF SHORTTERM CREDITORS ARE COVERED BY ASSETS

1.2

QUICK OR ACID TEST RATIO=

CURRENT ASSETS INVENTORIES CURRENT LIABILITIES - IT MEASURES THE EXTENT TO WHICH THE COMPANY COULD PAY OFF ITS SHORT-TERM OBLIGATIONS WITHOUT RELYING ON THE SALE OF INVENTORIES.

1.3 CASH FLOW LIQUIDITY =

CASH + MARKETABLE SECURITIES + CASH FLOW FROM OPERATING ACTIVITIES

CURRENT LIABILITIES

- IT MEASURES SHORT-TERM LIQUIDITY BY CONSIDERING AS CASH RESOURCES (NUMERATOR) THE CASH + CASH EQUIVALENTS + CASH FLOW FROM OPERATING ACTIVITIES

1.4

AVERAGE COLLECTION PERIOD =

NET ACCOUNTS RECEIVABLE NET SALES/365 - IT INDICATES DAYS REQUIRED TO CONVERT RECEIVABLE INTO CASH

1.5

DAYS INVENTORY HELD =

INVENTORY / AVERAGE DAILY COST OF SALES - IT INDICATES DAYS REQUIRED TO SELL INVENTORY

 1.6

DAYS PAYABLE OUTSTANDING

ACCOUNTS PAYABLE / AVERAGE DAILY COST OF SALES - IT INDICATES DAYS REQUIRED TO PAY SUPPLIERS

1.7

CASH CONVERSION OR NET TRADE CYCLE (AVERAGE COLLECTION PERIOD + DAYS INVENTORY HELD ) DAYS PAYABLE OUTSTANDING
- IT INDICATES THE DAYS IN THE NORMAL OPERATING CYCLE OR CASH CONVERSION CYCLE OF A FIRM.

2.1 ACCOUNTS RECEIVABLE TURNOVER NET SALES / NET ACCOUNTS RECEIVABLE - IT INDICATES HOW MANY TIMES RECEIVABLES ARE COLLECTED DURING A YEAR, ON AVERAGE

 2.2

INVENTORY TURNOVER
COST OF GOODS SOLD / INVENTORIES - IT MEASURES EFFICIENCY OF THE FIRM IN MANAGING AND SELLING INVENTORY

2.3

PAYABLES TURNOVER
COST OF GOODS SOLD / ACCOUNTS PAYABLE - IT MEASURES EFFICIENCY OF THE FIRM IN PAYING SUPPLIERS

2.4

FIXED ASSET TURNOVER

NET SALES / NET PROPERTY, PLANT AND EQUIPMENT - IT MEASURES EFFICIENCY OF THE IFRM IN MANAGING FIXED ASSETS

2.5

TOTAL ASSET TURNOVER

NET SALES / TOTAL ASSETS - IT MEASURES EFFICIENCY OF THE FIRM IN MANAGING TOTAL ASSETS

3.1

DEBT RATIO
TOTAL LIABILITIES / TOTAL ASSETS - IT SHOWS PROPORTION OF ALL ASSETS THAT ARE FINANCED WITH DEBT

3.2

LONG TERM DEBT TO TOTAL CAPITALIZATION LONG TERM DEBT LONG TERM DEBT + STOCKHOLDERS EQUITY
- IT MEASURES THE EXTENT TO WHICH LONG-TERM DEBT IS USED FOR PERMANENT FINANCING

3.3

DEBT TO EQUITY
TOTAL LIABILITIES STOCKHOLDERS EQUITY - IT MEASURES DEBT RELATIVE TO EQUITY BASE

3.4

FINANCIAL LEVERAGE INDEX

RETURN ON EQUITY ADJUSTED RETURN ON SSETS - IT INDICATES IF A FIRM IS EMPLOYING DEBT SUCCESSFULLY

3.5

TIMES INTEREST EARNED

OPERATING PROFIT INTEREST EXPENSE - MEASURES HOW MANY TIMES INTEREST EXPENSE IS COVERED BY OPERATING EARNINGS

3.6

CASH INTEREST COVERAGE

CASH FLOW FROM OPERATING ACTIVITIES + INTEREST PAID + TAXES PAID INTEREST PAID - IT MEASURES HOW MANY TIMES INTEREST PAYMENTS ARE COVERED BY CASH FLOW FROM OPERATING ACTIVITIES

3.7

FIXED CHARGE COVERAGE

OPERATING PROFIT + LEASE PYMT INTEREST EXPENSE + LEASE PYMT - IT MEASURES COVERAGE CAPABILITY MORE BROADLY THAN TIMES INTEREST EARNED BY INCLUDING OPERTATING LEASE PAYMENTS AS A FIXED EXPENSE

3.8 CASH FLOW ADEQUACY

CASH FLOW FROM OPERATINGACTIVITIES CAPITAL EXPENDITURES + DEBT REPAYMENTS + DIVIDENDS PAID - IT MEASURES HOW MANY TIMES CAPITAL EXPENDITURES, DEBT REPAYMENTS AND CASH DIVIDENDS ARE COVERED BY OPERATING CASH FLOWS

4.1

GROSS PROFIT MARGIN

GROSS PROFIT / NET SALES - IT MEASURES PROFIT GENERATED AFTER CONSIDERATION OF COST OF PRODUCTS SOLD

4.2

OPERATING PROFIT MARGIN

OPERATING PROFIT / NET SALES - IT MEASURES PROFIT GENERATED AFTER CONSIDERATION OF OPERATING EXPENSES

4.3

EFFECTIVE TAX RATE

INCOME TAXES EARNINGS BEFORE INCOME TAXES - IT MEASURES THE PERCENTAGE THE COMPANY RECOGNIZES AS TAX EXPENSE RELATIVE TO INCOME BEFORE TAXES

4.4

NET PROFIT MARGIN

NET PROFIT / NET SALES - MEASURES PROFIT GENERATED AFTER CONSIDERATION OF ALL EXPENSES AND REVENUES

4.5

CASH FLOW MARGIN

CASH FLOW FROM OPERATING ACTIVITIES NET SALES

- IT MEASURES THE ABILITY OF THE FIRM TO GENERATE CASH FROM SALES

4.6

RETURN ON TOTAL ASSETS

NET EARNINGS / TOTAL ASSETS - IT MEASURES OVERALL EFFICIENCY OF FIRM IN MANAGING ASSETS AND GENERATING PROFITS

4.7

RETURN ON EQUITY
NET EARNINGS / STOCKHOLDERS EQUITY - MEASURES RATE OF RETURN ON STOCKHOLDERS (OWNERS) INVESTMENT

4.8

CASH RETURN ON ASSETS

CASH FLOW FROM OPERATING ACTIVITIES TOTAL ASSETS

- IT MEASURES THE RETURN ON ASSETS ON A CASH BASIS

5.1

EARNINGS PER COMMON SHARE

NET EARNINGS / AVERAGE COMMON SHARES OUTSTANDING

- IT SHOWS RETURN TO COMMON STOCK SHAREHOLDERS FOR EACH SHARE OWNED

5.2

PRICE TO EARNINGS
MARKET PRICE OF COMMON SHARES EARNINGS PER SHARE - IT EXPRESSES A MULTIPLE THAT THE STOCK MARKET PLACES ON A FIRMS EARNINGS

5.3

DIVIDEND PAYOUT
DIVIDENDS PER SHARE EARNINGS PER SHARE - IT SHOWS PERCENTAGE OF EARNINGS PAID TO SHAREHOLDERS

5.4

DIVIDEND YIELD
DIVIDENDS PER SHARE MARKET PRICE OF COMMON STOCK - IT SHOWS THE RATE EARNED BY SHAREHOLDERS FROM DIVIDENDS RELATIVE TO CURRENC PRICE OF STOCK