FINANCIAL RATIO

1. Liquidity Ratio
-

Current Ratio = CA/CL

o Relationship between current assets and current liabilities
Acid-test Ratio (Quick Ratio) = (CA-Inventories)/CL)
o Similar with the current ratio but excluding the inventories,
supplies, and prepaid expenses. Indicates the relationship between
the amt of assets that can quickly be turned into cash versus the
amt of current liability.
Working Capital = CA-CL
o Indicator whether the business will be able to meet its current
obligations. The greater the working capital the more likely it will be
able to make its obligations in time.

2. Profitability Ratio
-

Return on Equity = Net Income After Taxes/Average Total

Partners Capital
(Beg capital + Ending capital)/2) = average partners
capital
o Reveals the percentage of net income after taxes that the partners
earned on its average partners capital balances during the year
- Return on Investments = Net Income After Taxes/Average Total
Assets
o Performance measure used to evaluate the efficiency of an
investment
- Return on Sales = Net Income After Taxes/Sales
o Evaluate the companys operational efficiency.
o How much profit is earned every peso sales
- Gross Profit Margin = Gross Profit/Sales
o The gross margin represents the percent of total sales revenue that
the company retains after incurring the COGS. The higher the
percentage, the more the company retains on each peso of sales to
service its other costs and obligations.
3. Stability
- Debt-to-asset = TL/TA
o Total debt to total assets is a leverage ratio that defines the total
amount of debt relative to assets. The higher the ratio, the higher
the degree of leverage, and consequently, financial risk.
- Debt-to-Equity = TL/Total Partners Capital
o It indicates what proportion of equity and debt the company is
using to finance its assets.
http://www.accountingcoach.com/financial-ratios/explanation/2

Capital Budgeting
1. Payback Period = Net investment/annual cash returns
o Time required to recover the amt of initial investment
2. Discounted Payback Period = Net Investment/PV of cash returns
o Same as payback period but considering time value of money
3. Net Present Value = total PV cash returns for 5 years of operations
Initial Investment
o Positive result indicates that the project will earn a greater return
4. Profitability Index = PV of cash returns/Initial Investment
o Expresses the PV of cash benefits as to amt per peso of investment. As
values on the profitability index increase, so does the financial
attractiveness of the proposed project. Greater profitability index
indicates that the business is desirable.
5. Internal Rate of Return (IRR)
o Generally speaking, the higher a project's internal rate of return, the
more desirable it is to undertake the project.
o Wooden Prints accumulated Return on Sales after 5 years is higher
than its IRR during the 5 years of operations. This means that there will
be a greater return on sales than the hurdle rate (IRR)