FINANCIAL RATIOS

Current Ratio. The current ratio is a popular financial ratio used to test a
company's liquidity (also referred to as its current or working capital position) by deriving the
proportion of current assets available to cover current liabilities.
The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash
equivalents, marketable securities, receivables and inventory) are readily available to pay off its
short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and
taxes). In theory, the higher the current ratio, the better.
Acid-Taste Ratio. The quick ratio - aka the quick assets ratio or the acid-test ratio - is a liquidity
indicator that further refines the current ratio by measuring the amount of the most liquid current
assets there are to cover current liabilities. The quick ratio is more conservative than the current
ratio because it excludes inventory and other current assets, which are more difficult to turn into
cash. Therefore, a higher ratio means a more liquid current position.
Debt Ratio. A financial ratio that measures the extent of a companys or consumers leverage.
The debt ratio is defined as the ratio of total long-term and short-term debt to total assets,
expressed as a decimal or percentage. It can be interpreted as the proportion of a companys
assets that are financed by debt.
The higher this ratio, the more leveraged the company is, implying greater financial risk. At the
same time, leverage is an important tool that companies use to grow, and many businesses find
sustainable uses for debt.
Time-Interest Earned Ratio. A metric used to measure a company's ability to meet its debt
obligations. It is calculated by taking a company's earnings before interest and taxes (EBIT) and
dividing it by the total interest payable on bonds and other contractual debt. It is usually quoted
as a ratio and indicates how many times a company can cover its interest charges on a pretax
basis. Failing to meet these obligations could force a company into bankruptcy.
Average Payment Period. Average payment period means the average period taken by the
company in making payments to its creditors. It is computed by dividing the number of working
days in a year by creditors turnover ratio.
Inventory Turnover. Inventory turnover is a ratio showing how many times a company's
inventory is sold and replaced over a period. The days in the period can then be divided by the
inventory turnover formula to calculate the days it takes to sell the inventory on hand or
"inventory turnover days."
Generally it is calculated as:Inventory Turnover = Sales / Inventory
Hwoever, it may also be calculated as: Inventory Turnover = Cost of Goods Sold / Average
Inventory

Days sales of Inventory Value. The days sales of inventory value, or DSI, is a financial
measure of a company's performance that gives investors an idea of how long it takes a company
to turn its inventory (including goods that are a work in progress, if applicable) into sales.
Generally, a lower (shorter) DSI is preferred, but it is important to note that the average DSI
varies from one industry to another.
Fixed Asset Turnover. A financial ratio of net sales to fixed assets. The fixed-asset turnover
ratio measures a company's ability to generate net sales from fixed-asset investments specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset
turnover ratio shows that the company has been more effective in using the investment in fixed
assetsto generate revenues.
Asset Turnover. The ratio of the value of a companys sales or revenues generated relative to the
value of its assets. The Asset Turnover ratio can often be used as an indicator of
the efficiency with which a company is deploying its assets in generating revenue.
Asset Turnover = Sales or Revenues / Total Assets
Generally speaking, the higher the asset turnover ratio, the better the company is performing,
since higher ratios imply that the company is generating more revenue per dollar of assets. Yet,
this ratio can vary widely from one industry to the next. As such, considering the asset turnover
ratios of an energy company and a telecommunications company will not make for an accurate
comparison. Comparisons are only meaningful when they are made for different companies
within the same sector.
Gross Profit Margin. A financial metric used to assess a firm's financial health by revealing the
proportion of money left over from revenues after accounting for the cost of goods sold. Gross
profit margin serves as the source for paying additional expenses and future savings.
The gross margin is not an exact estimate of the company's pricing strategy but it does give a
good indication of financial health. Without an adequate gross margin, a company will be unable
to pay its operating and other expenses and build for the future. In general, a company's gross
profit margin should be stable. It should not fluctuate much from one period to another, unless
the industry it is in has been undergoing drastic changes which will affect the costs of goods sold
or pricing policies.
Operating Profit Margin. Operating margin is a margin ratio used to measure a company's
pricing strategy and operating efficiency.
Operating margin is a measurement of what proportion of a company's revenue is left over after
paying for variable costs of production such as wages, raw materials, etc. It can be calculated by
dividing a companys operating income (also known as "operating profit") during a given period
by its net sales during the same period. Operating income here refers to the profit that a
company retains after removing operating expenses (such as cost of goods sold and wages)

and depreciation. Net sales here refers to the total value of sales minus the value of returned
goods, allowances for damaged and missing goods, and discount sales.
Net Profit Margin. Net margin is the ratio of net profits to revenues for a company or business
segment - typically expressed as a percentage that shows how much of each dollar earned by
the company is translated into profits.
Basic Earning Power. The Basic Earning Power ratio (BEP) is Earnings Before Interest and
Taxes (EBIT) divided by Total Assets.
The higher the BEP ratio, the more effective a company is at generating income from
its assets.
Using EBIT instead of operating income means that the ratio considers all income earned by
the company, not just income from operating activity. This gives a more complete picture of how
the company makes money.
BEP is useful for comparing firms with different tax situations and different degrees
of financial leverage.
Debt to Equity Ratio. Debt/Equity Ratio is a debt ratio used to measure a company's
financial leverage, calculated by dividing a companys total liabilities by its stockholders' equity.
The D/E ratio indicates how much debt a company is using to finance its assets relative to the
amount of value represented in shareholders equity.
Return on Assets. An indicator of how profitable a company is relative to its total assets. ROA
gives an idea as to how efficient management is at using its assets to generate earnings.
Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a
percentage. Sometimes this is referred to as "return on investment".
Return on Equity. The amount of net income returned as a percentage of shareholders equity.
Return on equity measures a corporation's profitability by revealing how much profit a company
generates with the money shareholders have invested.