Indicates the degree of leverage (percentage of total

assets funded through creditors)

The lower , the better

CURRENT RATIO/ DEBT TO
WORKING CAPITAL TOTAL ASSETS
RATIO (Leverage)
RATIO
indicates short-term debt-paying ability
The higher the ratio, the better
TIMES INTEREST
QUICK EARNED Indicates entity's ability to sustain debt by measuring its
RATIO/ACID-TEST SOLVENCY ability to meet interest payments from operating
RATIO entity's ability to profit as they fall due
indicates immediate short-term liquidity survive over a long CASH DEBT The higher, the better
The higher the ratio, the better period of time COVERAGE Indicates entity's ability to repay liabilities from cash
excludes inventory, prepaid assets which are LEAST generated from operating activities without having
current assets CURRENT liquidate assets used in operations
CASH DEBT The higher, the better
COVERAGE
Indicates short-term debt paying ability on a cash basis Indicates entity's ability to pay dividends or expand
operations
The higher the ratio, the better FREE CASH FLOW
reflects the whole period and does not just use year end The higher, the better
balances, it combines cash and accrual figures
RECEIVABLES
TURNOVER
Indicates the effectiveness of credit collection policies LIQUIDITY PROFITABILITY RETURN ON EQUITY RATIO
Indicates profitability of ordinary shareholders'
(how fast money is collected from debtors) short-term ability to pay profit/operatin success investment (earnings per dollar invested by the owners)
measures the number of times trade receivables are debts and meet unexpected of entity for a period of
converted into cash during the period The higher, the better
needs for cash time
The higher, the better
ACCOUNTING RATIOS Indicates overall profitability with respect to investment
in assets
RETURN ON ASSETS The higher, the better
indicates the liquidity of receivables and collection HOW TO ANSWER RATIO QUES
success
AVERAGE
the shorter the duration, the better COLLECTION Indicates profit generated by each dollar of sales
PERIOD
1. Explain what the ratio means (defn) PROFIT MARGIN It depends on the volume of firms but generally, the
indicates the liquidity of inventory (effectiveness of higher, the better
2. Give correct interpretation for the
inventory management) increase/decrease in the ratio. Is it good or bad?
INVENTORY What does it mean?
the higher the turnover, the better
TURNOVER 3 . Trend analysis from year to year - improving or Indicates how efficiently assets are used to generate
worsening? sales
ASSET TURNOVER
indicates the liquidity of inventory and inventory 3.A) Comparison between 2 or 3 entities - which is The higher, the better
management better?
AVERAGE DAYS
the shorter the duration, the better IN INVENTORY
converts inventory turnover into a measure of day for Indicates entity's ability to maintain an adequate selling
inventory to be sold price above its cost
GROSS PROFIT RATE
The higher, the better
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Indicates the costs incurred to support each dollar of
sales
OPERATING EXPENSES TO SALES RATIO
The lower , the better

Indicates the net cash flow generated by each dollar of

sales
CASH RETURN ON SALES RATIO
The higher, the better

Indicates profit per ordinary share

EARNINGS PER SHARE The higher, the better

Indicates relationship between market price per share

and earnings per share
PRICE EARNING RATIO