Current Ratio = Working Capital Ratio
Current Ratio = Working Capital Ratio
Current Assets
Current Liabilities
Measure of liquidity – a company has sufficient liquid assets to cover its current obligations.
The higher the ratio the better able a company can meet its current obligations.
Return on Assets = Net Income
Ave. Total Assets
Measure of how well a company uses its assets to create profits.
The company wants to create a return that satisfies its shareholders (owners).
Investors use this ratio to evaluate company leadership.
Return on Equity = Net Income
Ave. Equity
Measures the success of company’s financing, investing and operating activities.
A company that generates a high return relative to its shareholders equity is considered a sound investment. The original investors will be repaid with the proceeds from business operations.
Debt to Equity Ratio = Total Liabilities
Total Liab. + Equity
The more outstanding debt a company has, the more its earnings must go to making the payments on this debt load. This limits the amount of capital available to grow the business or pay dividends to the shareholders.
The more debt a company carries, the more the company is effectively owned by its lenders.
Inventory Cost of Goods Sold
Turnover Average Inventory
Average Inventory = Inventory @ BOY + Inventory @ EOY/2
Measures the success a company has in converting (turning) its investment in inventory into sales.
The number of times a company sells and replaces its inventory during a given period.
Average Days = 365
Sales in Inventory Inventory Turn
The number of days sales, on average, that a firm carries in inventory.
Acid Test Ratio = Quick Ratio
Current Assets - Inventory
Current Liabilities
A stringent test that indicates whether a company has enough current assets to cover immediate liabilities without selling inventory.
Accounts Receivable Turnover
/ /Sales / Average Net Accounts Receivable
The number of times the accounts receivable are turned over or are collected
during the period.
Average Collection Period
365 days per year / Accounts Receivable TurnThe number of days it takes on average to collect an account receivable.
Earnings Per Share
Net Income
Weighted Average number of shares of common stock
The dollar amount of earnings that is associated with each share of stock.
Book Value per Share (Liquidation Value)
Assets – Liabilites (or Owner’s Equity)
Number of shares of common stock at the end of the year
The dollar amount of equity that is associated with each share of stock.
Price Earnings Ratio
Market Price per share
Earnings per share
This tells you how expensive a share of stock is in relation to its earnings.