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 debtpaying ability – how much do we have available for every $1 of liabilities.  
Acidtest (quick) Ratio 
Quick Assets (Cash + Marketable Securities + net receivables) Current Liabilities 
Test of immediate debtpaying 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 shortterm, 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  
Priceearnings 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. 
Licenses and Attributions
More Study Resources for You
The materials found on Course Hero are not endorsed, affiliated or sponsored by the authors of the above study guide
Show More