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Business LibreTexts

12.8: Ratio Summary

  • Page ID
    10690
  • 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.