Chapter 4 - Ratios 1 Liquidity Ratios give us an idea of...

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Ratios 1. Liquidity Ratios – give us an idea of the firm’s ability to pay off debts that are maturing within a year. 2. Asset Management Ratios – give us an idea of how efficiently the firm is using its assets. 3. Debt Management Ratios – give us an idea of the firm has financed its assets as well as the firm’s ability to repay its long-term debt. 4. Profitability Ratios – give us an idea of how profitably the firm is operating and utilizing its assets. 5. Market Value Ratios – bring in the stock price and give us an idea of what investors think about the firm and its future prospects. Liquidity Ratios Current Ratio = Current Assets(CA) / Current Liabilites (CL) Current Assets = cash, marketable securities, accounts receivable, and inventories. Current Liabilities = accounts payable, accrued wages, and taxes Quick or Acid Test Ratio = Current Assets – Inventories / Current Liabilities Asset Management Ratios Inventory Turnover Ratio = Sales / Inventories
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