1. Current ratio = current assets / current liabilities.
The current ratio is used to evaluate the liquidity, or ability to meet short term debts.
High current ratios are needed for companies that have difficulty borrowing on short term
notice.
The generally acceptable current ratio is 2:1
The minimum acceptable current ratio is 1:1
2. Acid Test Ratio = (cash + marketable securities) / current liabilities
The acid test ratio measures the immediate amount of cash immediately available to satisfy short
term debt.
3. Debt to Equity Ratio = Short Term Debt + Long Term Debt
Total Shareholders’ Equity
Debt to Equity Ratio is also referred to as Debt Ratio, Financial Leverage Ratio or Leverage Ratio.
The debt to equity (debt or financial leverage) ratio indicates the extent to which the business
relies on debt financing.
Upper acceptable limit of the debt to equity (debt or financial leverage) ratio is usually 2:1, with
no more than one-third of debt in long term.
A high financial leverage or debt to equity ratio indicates possible difficulty in paying interest
and principal while obtaining more funding.
4. Financial Leverage Ratio = total debt / shareholders equity.
The financial leverage ratio is also referred to as the debt to equity ratio.
The financial leverage ratio indicates the extent to which the business relies on debt financing.
Upper acceptable limit of the financial leverage ratio is usually 2:1, with no more than one-third
of debt in long term.
A high financial leverage ratio indicates possible difficulty in paying interest and principal
while obtaining more funding.
5. Net Profit Margin Ratio (After Tax Margin Ratio) = net profit after tax / sales.
6. Pretax Margin Ratio = net profit before taxes / sales.
7. Operating Profit Margin (Operating Margin) = net income before interest and taxes /
sales.
These three profit margin ratios state how much profit the company makes for every dollar of
sales.
The net profit margin ratio is the most commonly used profit margin ratio.
A low profit margin ratio indicates that low amount of earnings, required to pay fixed costs and
profits, are generated from revenues.
A low profit margin ratio indicates that the business is unable to control its production costs.
The profit margin ratio provides clues to the company's pricing, cost structure and production
efficiency.
The profit margin ratio is a good ratio to benchmark against competitors.
8.Price Earnings (P/E) Ratio = market price per share
Earnings per share.
A decrease in the price earnings ratio (p/e ratio) may indicate a lack of confidence in the
company's ability to maintain earnings growth.
9. Return on Assets = net profit before taxes / total assets.
The return on assets ratio provides a standard for evaluating how efficiently financial
management employs the average dollar invested in the firm's assets, whether the dollar came
from investors or creditors.
A low return on assets ratio indicates that the earnings are low for the amount of assets.
The return on assets ratio measures how efficiently profits are being generated from the assets
employed.
A low return on assets ratio compared to industry averages indicates inefficient use of business
assets.
10. Return on Investment Ratio = net profits before tax / shareholders equity.
The return on investment ratio provides a standard return on investor's equity.
The return on investment ratio is also referred to as return on investment or ROI.
Return on Investment is a key ratios for investors.
Turnover Ratios
Accounts Receivable Turnover Ratio = annual credit sales
Average accounts receivable
This is the ratio of the number of times that accounts receivable amount is collected throughout
the year.
A high accounts receivable turnover ratio indicates a tight credit policy.
A low or declining accounts receivable turnover ratio indicates a collection problem, part of
which may be due to bad debts.
Accounts Payable Turnover Ratio = total supplier purchases
Average accounts payable
The accounts payable turnover ratio shows the number of times that accounts payable are paid
throughout the year.
A falling accounts payable turnover ratio indicates that the company is taking longer to pay its
suppliers.
Asset Turnover Ratio = sales
Fixed assets
A low asset turnover ratio means inefficient utilization or obsolescence of fixed assets, which
may be caused by excess capacity or interruptions in the supply of raw materials.
Cash Turnover = (cost of sales {excluding depreciation})
Cash
Cash Turnover Ratio = (365 days)
Cash balance ratio
The cash turnover ratio indicates the number of times that cash turns over in a year.
Inventory Turnover Ratio = cost of goods sold
Average inventory
The inventory turnover ratio measures the number of times a company sells its inventory during
the year.
A high inventory turnover ratio indicated that the product is selling well.
The inventory turnover ratio should be done by inventory categories or by individual product.
Dividend Payout Ratio = annual dividends per share
Net income
The dividend payout ratio shows the portion of earnings that are paid out in dividends.
A low dividend payout ratio indicates that a large portion of the profits are retained and likely
invested for growth.
Dividend Yield = annual dividends per share
Price per share
The dividend yield is the yield a company pays out to its shareholders in terms of dividends.
