Liquidity Ratios

They measure the ability of a company to pay its short term debts obligations. Generally, you want a high liquidity ratio, at least greater than 1. There are two very important Liquidity Ratios:

Current Ratio: Current Assets/Current Liabilities

Quick(Acid test) Ratio: (Current Assets-Inventories)/Current Liabilities

As you can see, the Quick or Acid test does not count the inventory since it's typically the least liquid item from the company's current assets.

Turnover Ratios

They determine the ability of a company to turnover its assets into sales.

Inventory Turnover Ratio: Sales/Inventories

Generally, you want a ITR to be greater than 1.

Days Sales Outstanding (DSO): Receivables/(Annual Sales/365)

or Receivables/(Average Sales Per Day)

The higher this ratio the longer are customers paying back the firm (NOT GOOD).

Fixed Assets Turnover Ratio: Sales/Net Fixed Assets

Total Assets Turnover Ratio: Sales/Total Sales

Generally, you want these ratios to be greater than 1

Debt Ratios

They measure the company's debt levels

Debt Ratio: Total Liabilities/Total Assets

Generally, you want your debt ratio to be less than 1

Debt to equity ratio: Total Liabilities/(Total Assets -Total Liabilities)

Market Debt Ratio: Total Liabilities/(Total Liabilities + Market Value of Equity)

Times-interest-earned ratio: *EBIT/Interest Expense

*EBIT is Earning Before Interest and Taxes

Profitability Ratios

They measure how profitable is the company

Net Profit Margin: Net Income/Sales

Operating Profit Margin: *EBIT/Sales

*EBIT is Earning Before Interest and Taxes

Return On Assets: Net Income/Total Assets

Return on Common Equity: Net Income/Common Equity