Ratio Analysis

i) Short-Term Solvency, or Liquidity, Measures: (Liquidity Ratios)

a) Current ratio: To indicate the ability to meet currently maturing (debt)
obligations with current assets.





b) Quick ratio: To indicate instant debt paying ability with most liquid (quick)
current assets.




ii) Long-Term Solvency Measures: (Liquidity Ratios *cont+)

a) Debt to Assets ratio: Assess the amount of borrowed funds which a
company used to finance company assets.





b) Debt to Equity ratio: Assess the funds provided by creditors versus the
funds by owners.





c) Debt to Capitalization ratio: Assess the financial leverage of a firm
through we can analyze the company's risk exposure.





d) Interest Coverage ratio: (Also called Time Interest Earned Ratio) indicates
the ability of the company to meet its annual interest.

e) Cash Coverage ratio: Indicates the ability of the cash flow available to
meet financial obligations.

iii) Asset Management (or Turnover) Measures: (Activity Ratios)

a) Inventory Turnover: To assess that how many times the inventory has
been turned over (sold) during the year. It provides efficiency in the
management of Inventory by insight into liquidity of inventory and
tendency to overstock.





b) Days Sales in Inventory: To assess the average number of days the
inventory is held before it is turned into account receivables through sale.








c) Account Receivables Turnover: To assess that how many times the
receivables has been turned over (in to cash) during the year.

d) Average Collection Period: To assess the average number of days the
account receivables are outstanding before being collected.








e) Account Payables Turnover: To assess that how many times the
receivables has been turned over (in to paid) during the year.

f) Average Payments Period: To assess the average number of days the
account payables are outstanding before being paid.

g) Total Assets Turnover: (Also called Capital Turnover) to measure the
efficiency of total assets to generated sales.

h) Net Working Capital Turnover: This ratio measures how much work we
get out of our working capital.

i) Length of operating cycle:


iv) Profitability Measures: (Activity Ratios *cont+)

a) Net Profit Margin: Indicates the revenue required to earn a dollar profit
after tax.





b) Gross Profit Margin: Indicates the profit available for non-manufacturing
overhead.





c) Return on Assets: (Also called Return on Investments) indicates the
efficiency of generating profits with available assets.




Also can be calculated by:

d) Return on Equity: to measure the earning power on shareholders book-
value investment.




Also can be calculated by:

e) Equity Multiplier: Indicates the ratio of total assets and total equity of the
company.





f) Earnings per share: Indicates the after tax earnings for the common stock
shareholders.






v) Market Value Measures:

a) Price Earnings ratio: Assess the amount investors are willing to pay for
each dollar of earnings.





b) Market to Book Ratio: book value per share is total equity (not just common
stock) divided by the number of shares outstanding.





c) Dividend payout Ratio: Indicates the percentage of profit that is paid out
as dividends.





d) Dividend Yield: Indicates the dividend rate of return to common
shareholders at the current market price.