LIQUIDITY RATIO – they measure the Change in Earnings Before Interest and Taxes or
sufficiency of the firms cash resources to meet its
short-term cash obligation
CURRENT RATIO – Current Assets/Current
Liabilities
QUICK RATIO OR ACID TEST RATIO – Cash
+ Marketable Securities + Net Accounts
Receivables/Current Liabilities
CASH RATIO – Cash & Cash Equivalents +
Marketable Securities/Current Liabilities
CASH FLOW RATIO – Operating Cash
Flow/Period-End Current Liabilities
CASH FLOW LIQUIDITY RATIO – Cash &
Cash Equivalents+ Marketable Securities +
Operating Cash Flow
NET WORKING CAPITAL RATIO – Net
Working Capital/Total Assets
Note: Net Working Capital = Current Assets –
Current Liabilities
DEFENSIVE INTERVAL RATIO (DIR) OR
BASIC DEFENSE INTERVAL (BDI) – Cash +
Marketable Securities + Net Accounts
Receivables/Projected Daily Operating Expenses
LEVERAGE, CAPITAL STRUCTURES,
AND EARNING COVERAGE RATIOS – they
evaluate the firms ability to satisfy its debt and
obligations for other fixed financing charges such as
operating leases by looking at the mix of its
financing sources and its historical earnings
A. LEVERAGE – in general, refers to the
potential to earn a high level of return
relative to the amount of cost expended
FINANCIAL LEVERAGE RATIO OR EQUITY
MULTIPLIER – Total Assets/Total Equity
DEGREE OF FINANCIAL LEVERAGE (DFL)
(2 PERIODS AND 1 PERIOD,
RESPECTIVELY) - % Change in Net Income/%
EBIT/Earnings Before Taxes
DEGREE OF OPERATING LEVERAGE - %
Change in Earnings Before Interest and Taxes/%
Change in Sales or Contribution Margin/EBIT
DEGREE OF TOTAL LEVERAGE - % Change
in Net Income/% Change in Sales or Contribution
Margin/EBT
B. CAPITAL STRUCTURES – refers to the
way a firm chooses to finance its business.
Solvency is the ability of the company to
pay its long term obligations as they come
due.
DEBT TO EQUITY RATIO – Total
Liabilities/Total Equity
LONG TERM DEBT TO EQUITY RATIO –
Total Debt-Current Liabilities/Total Equity
DEBT TO TOTAL ASSETS RATIO - Total
Liabilities/Total Assets
C. EARNINGS COVERAGE RATIO – focus on
the company’s earning power, because the
company’s earning powers is the source of its
ability to make interest payments and principal
repayments on debt
INTEREST COVERAGE (TIMES INTEREST
EARNED) RATIO - Earnings Before Interest and
Taxes(EBIT)/Interest Expense
CASH FLOW TO FIXED CHARGES RATIO –
Adjusted Operating Cash Flow/Fixed Charges
ACTIVITY RATIOS – they provide
information on a firm's ability to manage efficiently
its current assets (accounts receivable and
inventory) and current liabilities (accounts payable).
1. ACCOUNTS RECEIVABLE ACTIVITY
RATIO
ACCOUNTS RECEIVABLE TURN-OVER 6. FIXED ASSETS TURNOVER RATIO -
RATIO - Net Annual Credit Sales/Average Gross Sales Average Net Property, Plant and
Accounts Receivable Equipment

DAYS SALES IN RECEIVABLES (AVERAGE PROFITABILITY ANALYSIS - measures

COLLECTION PERIOD) – 365/Receivables
Turnover Ratio or Average Gross Accounts
Receivable/Average Daily Net Credit Sales (Net
Annual Credit Sales ÷ 365)
2. INVENTORY ACTIVITY RATIO
the firm’s profit in relation to its total revenue or the
amount of net income from each dollar of sales and
its return on invested assets.
GROSS PROFIT MARGIN PERCENTAGE -
Gross Profit/Net Sales

INBVENTORY TURNOVER RATIO - Annual OPERATING PROFIT MARGIN

Cost of Goods Sold/Average Inventory PERCENTAGE - Operating Income/Net Sales

DAYS SALES IN INVENTORY – 365/Inventory NET PROFIT MARGIN PERCENTAGE – Net

Turnover OR Average Inventory/Average Daily
Cost of Sales (Annual Cost of Sales ÷ 365)
3. ACCOUNTS PAYABLE ACTIVITY
RATIO - indicate the speed with which the
company pays its suppliers.
ACCOUNTS PAYABLE TURN-OVER RATIO
- Annual Credit Purchases/Average Accounts
Payable
Income/Net Sales
RETURN ON ASSETS (ROA) – Net
Income/Average Total Assets
RETURN ON EQUITY (ROE) – Net
Income/Average Total Equity
RETURN ON COMMON EQUITY - Net Income
– Preferred Dividends/Average Common Equity

DAYS PURCHASES IN ACCOUNTS

PAYABLE - Average Accounts Payable/Average
Daily Credit Purchases (Annual Credit Purchases ÷
365) OR 365/Accounts Payable Turnover

4. OPERATING CYCLE AND CASH

CYCLE

OPERATING CYCLE - Days Sales in

Receivables + Days Sales in Inventory

CASH CYCLE OR CASH CONVERSION

CYCLE OR NET OPERATING CYCLE -
Operating Cycle – Days Purchases in Accounts
Payable OR Days Sales in Receivables + Days
Sales in Inventory – Days Purchases in Accounts
Payable

5. TOTAL ASSET TURNOVER RATIO –

Sales/Average Total Assets