LIQUIDITY RATIOS As we know from word liquidity which means to liquefy; it shows how

quickly company clear their short term liabilities with the current assets, quick cash, cash and
cash equivalents

Current ratio:-
They are also called working capital ratio. They measure how efficiently company uses their
current assets to clear their short term liabilities that due within a year.

Formula : current assets / current liabilities

Cash ratio:
Cash ratio measures the company’s total cash and cash equivalents to its current liabilities. It is
use to calculates a company’s ability to repay its short term debts with cash or near-cash
resources.

Formula : cash + cash equivalents / current Liabilities

Quick ratio:
Quick ratio is also known as acid-test ratio which measures the ability of the company to use its
near cash or quick assets to extinguish or retire its current liabilities immediately.

Formula : Cash+ cash Receivable / current liabilities

PROFITABILITY RATIOS Profitability ratios assess a company’s ability to earn profits from
its sales, assets or equity. Profitability ratio indicates how efficiently company generates profit
and value of shareholder.

Gross profit margin:

It indicates the efficiency of operations and the firm’s pricing policies. It tells the profit of the
firm relative to sales. It is a profitability ratio that shows the relationship between company gross
profit with respect to net sales or revenue. It measure how much profit company make from its
sales after deducting its COGS.

Formula

Gross profit / net sales * 100

Net profit margin:-

It indicates the firm’s profitability after taking account of all expenses and income taxes. It is a
profitability ratio used to measure the percentage of profit building ability of the company with
respect to its total revenue during a given period
Return on assets:-

 It indicates the profitability on the assets of the firm (after all expenses and taxes). It is
the profitability of business with respect to its total assets. It measures percentage of
profit company make from the capital they invested in assets or how well they used their
economic resources to generate net income.
 Return on assets = (net income / average total assets) * 100
 Return on equity: ROE is the measurement of how effectively a business uses
equity. It shows the percentage of the profit company makes from the shareholders equity
it indicates the profitability to the shareholders of the firm (after all expense and taxes).
ROE is the measurement of how effectively a business uses equity. It shows the
percentage of the profit company make from the shareholder’s equity.
 Return on equity = net income / shareholder’s equity

Operating profit margin ratio

The operating profit margin measures how much a profit company makes
through its sales after paying for variable cost of production but before
paying interest or tax.

Formula: operating profit / net sales * 100

EBIDA:
Earnings before interest, taxes, depreciation and amortization (EBITDA) is the primary
calculation used to determine how much of a company's cash flow comes from ongoing
operations. It is an important indicator of the health of a business.
Formula: EBITDA= Net profit+ Tax + interest + depreciation + amortization
EBITDA / net sales
Interest coverage ratio The interest coverage ratio is a financial ratio that measures a
company's ability to make interest payments on its debt in a timely manner.