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Unformatted text preview: A. Liquidity 1. Current ratio = Current assets Current Liabilities 2. Acid test ratio = Quick assets Current Liabilities B. Solvency 1. Debt to Equity ratio = Total liabilities Total Stockholder's Equity 2. Debt to Asset ratio = Total liabilities Total assets 3. Equity to Asset ratio = Total Stockholder's Equity Total assets C. Profitability 1. Return on Assets = Net Profit Total assets 2. Return on Owner's Equity = Net Profit Total Stockholder's Equity 3. Earning per share = Net Profit Total Outstanding shares (average) Ratios and Formulas in Customer Financial Analysis Financial statement analysis is a judgmental process. One of the primary objectives is identification of major changes in trends, and relationships and the investigation of the reasons underlying those changes. The judgment process can be improved by experience and the use of analytical tools. Probably the most widely used financial analysis technique is ratio analysis, the analysis of relationships between two or more line items on the financial statement. Financial ratios are usually expressed in percentage or times. Generally, financial ratios are calculated for the purpose of evaluating aspects of a company's operations and fall into the following categories: • liquidity ratios measure a firm's ability to meet its current obligations. • profitability ratios measure management's ability to control expenses and to earn a return on the resources committed to the business. • leverage ratios measure the degree of protection of suppliers of long-term funds and can also aid in judging a firm's ability to raise additional debt and its capacity to pay its liabilities on time. • efficiency, activity or turnover ratios provide information about management's ability to control expenses and to earn a return on the resources committed to the business. A ratio can be computed from any pair of numbers. Given the large quantity of variables included in financial statements, a very long list of meaningful ratios can be derived. A standard list of ratios or standard computation of them does not exist. The following ratio presentation includes ratios that are most often used when evaluating the credit worthiness of a customer. Ratio analysis becomes a very personal or company driven procedure. Analysts are drawn to and use the ones they are comfortable with and understand. Liquidity Ratios Working Capital Working capital compares current assets to current liabilities, and serves as the liquid reserve available to satisfy contingencies and uncertainties. A high working capital balance is mandated if the entity is unable to borrow on short notice. The ratio indicates the short-term solvency of a business and in determining if a firm can pay its current liabilities when due....
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- Spring '12