12.8 Ratio Summary

Type Ratio Formula Significance 
Liquidity Ratios
 Working Capital Current Assets – Current Liabilities Amount of current assets left over after paying liabilities
 Current ratio Current Assets

Current Liabilities
Test of debt-paying ability – how much do we have available for every $1 of liabilities.
 Acid-test (quick) Ratio Quick Assets (Cash + Marketable Securities + net receivables)

Current Liabilities
Test of immediate debt-paying ability – how much cash do we have available immediately to pay debt
 Cash flow liquidity ratio (Cash + Marketable securities + Cash flow from operating activities)

Current Liabilities
Test of short-term, debt paying ability
 Accounts Receivable Turnover Net credit sales (or net sales)

Average Accounts Receivable

**Avg Accounts Receivable is calculated as (beg. or last year’s accounts receivable + current year end Accounts receivable) / 2
Test of quality of accounts receivable – how many times have we collected avg accts receivable
 Days Sales Uncollected Accts Receivable, Net x 365 days

Net Sales

**Accts Receivable, Net means Accounts Receivable – Allowance for doubtful or uncollectible accounts.
How many days it takes to collect on accounts receivable
 Inventory Turnover Cost of Goods Sold

Average Inventory

**Avg Inventory is calculated as (beg. or last year’s inventory + current year end inventory) / 2
Test of management efficiency – how many times we have sold avg. inventory
 Days Sales in Inventory Ending Inventory x 365 days

Cost of Goods Sold
How many days it takes to sell inventory
 Total Asset Turnover Net Sales

Average Total Assets

**Avg Total Assets is calculated as (beg. or last year’s total assets + current year end total assets) / 2
How many times we have been able to sell the amount equal to avg total assets. Tests whether the volume of business is adequate.
Equity (or Solvency) Ratios
 Debt Ratio Total Liabilities

Total Assets
How much we owe in liabilities for every $1 in assets.
 Equity (or Stockholder’s Equity) Ratio Total Equity

Total Assets
How much equity we have for every $1 in assets.
 Debt to Equity Ratio Total Liabilities

Total Equity
How much we owe in liabilities for every $1 of equity.
 Stockholder’s Equity to Debt Ratio Total Equity

Total Liabilities
How much equity we have to cover $1 in liabilities.
Profitability Ratios
 Profit Margin Ratio Net Income

Net Sales
How much NET income we generate from every dollar of sales.
 Gross Margin Ratio Net sales – Cost of goods sold

Net Sales
How much gross profit is earned on every dollar of sales (also known as markup)
 Return on total assets Net Income

Average Total Assets

**Avg Total Assets is calculated as (beg. or last year’s total assets + current year end total assets) / 2
How many times we have earned back average total assets from net income.
 Return on common stockholder’s equity Net Income – Preferred dividends

Average common stockholder’s equity
How much net income was generated from every dollar of common stock invested.
 Basic Earnings per Share (EPS) Net Income – Preferred Dividends

Weighted Avg common shares outstanding
How much net income generate on every share of common stock
Market Prospects
 Price-earnings ratio Market price per common share

Earnings per share
How much the market price is for every dollar of earnings per share
 Dividend yield Annual cash dividends per share

Market price per share
How much dividends you receive based on every dollar of market price per share.
Click ratio summary for a printable copy.

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