Liquidity Ratios

these ratios show the cash levels of a company and the ability to turn other
assets into cash to pay off liabilities and other current obligations.

Liquidity is not only a measure of how much cash a business has. It is also a
measure of how easy it will be for the company to raise enough cash or convert
assets into cash.

Leverage Ratios

In other words, the financial leverage ratios measure the overall debt load of a
company and compare it with the assets or equity. This shows how much of the
company assets belong to the shareholders rather than creditors. When
shareholders own a majority of the assets, the company is said to be less
leveraged. When creditors own a majority of the assets, the company is
considered highly leveraged. All of these measurements are important for
investors to understand how risky the capital structure of a company and if it is
worth investing in.

Profitability ratios
These ratios basically show how well companies can achieve profits from their
operations.

Efficiency ratios often look at the time it takes companies to collect cash from
customer or the time it takes companies to convert inventory into cashin other
words, make sales.

Operating cycle is the number of days a company takes in realizing its inventories in cash. It
equals the time taken in selling inventories plus the time taken in recovering cash from trade
receivables. It is called operating cycle because this process of producing/purchasing
inventories, selling them, recovering cash from customers, using that cash to
purchase/produce inventories and so on is repeated as long as the company is in operations.A
short operating cycle is good as it tells that the company's cash is tied up for a shorter period.

The cash conversion cycle (CCC) is a metric that expresses the length of time, in days, that it
takes for a company to convert resource inputs into cash flows. The cash conversion cycle
attempts to measure the amount of time each net input dollar is tied up in the production and
sales process before it is converted into cash through sales to customers. This metric looks at
the amount of time needed to sell inventory, the amount of time needed to collect receivables
and the length of time the company is afforded to pay its bills without incurring penalties
ROI

A performance measure used to evaluate the efficiency of an investment or to compare the

efficiency of a number of different investments. ROI measures the amount of return on an
investment relative to the investments cost. To calculate ROI, the benefit (or return) of an
investment is divided by the cost of the investment, and the result is expressed as a
percentage or a ratio.

The return on investment formula:

Return on capital employed (ROCE) is a financial ratio that measures a company's

profitability and the efficiency with which its capital is employed. A higher ROCE indicates
more efficient use of capital. ROCE should be higher than the companys capital cost;
otherwise it indicates that the company is not employing its capital effectively and is not
generating shareholder value.

Asset turnover ratio is 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.

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.

The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily
a company can pay interest on outstanding debt. The interest coverage ratio may be
calculated by dividing a company's earnings before interest and taxes (EBIT) during a given
period by the amount a company must pay in interest on its debts during the same period.

The method for calculating interest coverage ratio may be represented with the following
formula: