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Ratios.pdf - ACC 691 Common Ratios Used In Analyzing...

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Page 1 of 3ACC 691 Common Ratios Used In Analyzing Financial StatementsLiquidity RatiosLiquidityis a measure of the firm’s ability to pay its short-term liabilities. It is an estimate of the firm’sviability in the short run. Recall that current assets are those assets expected to pay current liabilitiesand that liabilities are not considered current unless they are going to be paid with current assets.Therefore, liquidity analysis deals with looking at the relationships between current assets and currentliabilities. Typically, the current ratio should be a little over 150% to 200%, the quick ratio should bearound 100%, and the working capital should be positive. These ratios can be too large, in that a currentratio of 500% indicates that extra capital has not been invested as it should have been.Liquidity Ratios: Assessing Ability to Pay Short-Term DebtsCurrent RatioCurrent Ratio = Current Assets / Current LiabilitiesQuick Ratio or Acid-Test RatioQuick Ratio = Current AssetsInventoriesPrepaid Assets /Current LiabilitiesNet Working Capital RatioNet Working Capital Ratio = (Current AssetsCurrentLiabilities) / Total AssetsProfitability RatiosProfitability ratiosare intended to help measure the firm’s ability to produce profits by virtue of itsinvestments and capital acquisition.Return on assets(ROA) is as its name impliesthe percentage ofearnings on the average assets held during the year.Return on equity (ROE)andreturn on commonequity (ROCE)are intended to show the amount that the firm has earned on the average capitalgenerated by sale of stock.Profit marginshows the ratio of net income to net sales, indicating how well

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Term
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Financial Ratio

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