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Balance Sheet Ratios
Ratio
How to Calculate
What it Means In Dollars and Cents
Current
Current Assets
Measures solvency: The number of dollars in Current
Current Liabilities
Assets for every $1 in Current Lialilites.For example: a Current atio of 1.! means that for every $1 of Current Liabilities# the company has $1.! inCurrent Assets ith hich to pay them.%uic&
Cash ' Accounts eceivable
Measures li(uidity: The number of dollars in Cash and
Current Liabilities
Accounts eceivable for each $1 in Current Liabilities.For example: a %uic& atio of 1.1) means that for every $1 of Current Liabilities# the company has $1.1)in Cash and Accounts eceivable ith hich to paythem.*ebt+to+,orth
Total Liabilities
Measures financial ris&: The number of dollars of *ebt
-et ,orth
oed for every $1 in -et ,orth.For example: a *ebt+to+,orth ratio of 1./ means thatfor every $1 of -et ,orth that the oners have invested#the company oes $1./ of *ebt to its creditors.
Income Statement Ratios
0ross Marin
0ross 2rofit
Measures profitability at the 0ross 2rofit level: The number
3ales
of dollars of 0ross Marin produced for every $1 of 3ales.For example: a 0ross Marin atio of 4).)5 means thatfor every $1 of 3ales# the company produces 4).) centsof 0ross 2rofit.-et Marin
-et 2rofit 6efore Tax
Measures profitability at the -et 2rofit level: The number of
3ales
dollars of -et 2rofit produced for every $1 of 3ales.For example: a -et Marin atio of 7.85 means that for every $1 of 3ales# the company produces 7.8 cents of -et 2rofit.
Overall Efficiency Ratios
3ales+To+Assets
3ales
Measures the efficiency of Total Assets in eneratin
Total Assets
sales: The number of dollars in 3ales produced for every$1 invested in Total Assets.For example: a 3ales+To+Asset atio of 7.4/ means thatfor every $1 invested in Total Assets# the companyenerates $7.4/ in 3ales.eturn 9n
-et 2rofit 6efore Tax
Measures the efficiency of Total Assets in eneratin -et Assets
Total Assets
2rofit: The number of dollars in -et 2rofit produced for every $1 invested in Total Assets.For example: a eturn on Assets atio of !.15 meansthat for every $1 invested in Assets# the company iseneratin !.1 cents in -et 2rofit 6efore Tax.
eturn 9n
-et 2rofit 6efore Tax
Measures the efficiency of -et ,orth in eneratin -et
nvestment
-et ,orth
2rofit: The number of dollars in -et 2rofit produced for every $1 invested in -et ,orth.For example: a eturn on nvestment atio of 1 .15means that for every $1 invested in -et ,orth# thecompany is eneratin 1 .1 cents in -et 2rofit 6eforeTax.
Specific Efficiency Ratios
nventory
Cost of 0oods 3old
Measures the rate at hich nventory is bein used on anTurnover
:nventory
annual basis.For example: an nventory Turnover atio of 8.;1 meansthat the averae dollar volume of nventory is used upalmost ten times durin the fiscal year.nventory4
Converts the :nventory Turnover ratio into an avera1e <days
Turn+*ays
:nventory Turnover
inventory on hand< fiure.For example: a nventory Turn+*ays atio of 4! meansthat the company &eeps an averae of thirty+seven daysof nventory on hand throuhout the year. Accounts
3ales
Measures the rate at hich Accounts eceivable are beineceivable
Accounts eceivable
collected on an annual basis.TurnoverFor example: an Accounts eceivable Turnover atio of ;. means that the averae dollar volume of Accountsecievalbe are collected eiht times durin the year. Averae4 Converts the Accounts eceivable Turnover ratio into theCollection
A=Turnover
averae number of days the company must ait for its2eriodAccounts eceivable to be paid.For example: an Accounts eceivable Turnover ratio of )/ means that it ta&es the company )/ days on averaeto collect its receivables. Accounts
Cost of 0oods 3old
Measures the rate at hich Accounts 2ayable are bein2ayable
Accounts 2ayable
paid on an annual basis.TurnoverFor example: an Accounts 2ayable Turnover ratio of 17.) means that the averae dollar volume of Accounts2ayable are paid about telve times durin the year. Averae4 Converts the Accounts 2ayable Turnover ratio into the2aymentAccounts 2ayable Turnoveraverae number of days that a company ta&es to pay its2eriodAccounts 2ayable.For example: an Accounts 2ayable Turnover ratio of 4means that it ta&es the company 4 days on averae topay its bills.

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