Ratios

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1. Current Ratio or 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.
2. 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.
3. 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.
4. Debt to Equity Ratio
• Total Liabilities
• Total Liab. + Equity

• The more outstanding debt a company has, the more its earnings must go to making thepayments on this debt load. This limits the amount of capital available to grow the business or pay dividends to theshareholders.
• The more debt a companycarries, the more the company is effectively owned by its lenders.
5. Inventory Turnover
• Cost of Goods Sold
• 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.
6. Average Days Sales in Inventory
• 365
• Inventory Turn

The number of days sales, on average, that a firm carries in inventory.
7. Acid Test Ratio or Quick Ratio
Sales/ Average Net Accounts Receivable

The number of times the accounts receivable are turned over or are collected during the period.
8. Accounts Receivable Turnover
Sales/ Average Net Accounts Receivable

The number of times the accounts receivable are turned over or are collected during the period.
9. Average Collection Period
365 days per year / Accounts Receivable Turn

The number of days it takes on average to collect an account receivable.
10. 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
11. Book Value per Share (Liquidation Value)
• Assets – Liabilities (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
12. 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.
 Author: xxjclarksterxx ID: 22010 Card Set: Ratios Updated: 2010-06-04 18:41:17 Tags: Accounting Folders: Description: Ratios Show Answers: