Key Concepts:

1. Liquidity Ratios: Measure a company's ability to meet short-term obligations.

o Current Ratio: Current Assets/Current Liabilities\text{Current Assets} / \
text{Current Liabilities}Current Assets/Current Liabilities
o Quick Ratio: (Current Assets−Inventories)/Current Liabilities(\text{Current
Assets} - \text{Inventories}) / \text{Current Liabilities}
(Current Assets−Inventories)/Current Liabilities
2. Profitability Ratios: Assess a company's ability to generate profit.
o Net Profit Margin: Net Income/Revenue\text{Net Income} / \
text{Revenue}Net Income/Revenue
o Return on Assets (ROA): Net Income/Total Assets\text{Net Income} / \
text{Total Assets}Net Income/Total Assets
o Return on Equity (ROE): Net Income/Shareholder’s Equity\text{Net
Income} / \text{Shareholder's Equity}Net Income/Shareholder’s Equity
3. Leverage Ratios: Measure the extent of a company's financing through debt.
o Debt-to-Equity Ratio: Total Debt/Shareholder’s Equity\text{Total Debt} / \
text{Shareholder's Equity}Total Debt/Shareholder’s Equity
o Interest Coverage Ratio: EBIT/Interest Expense\text{EBIT} / \text{Interest
Expense}EBIT/Interest Expense
4. Efficiency Ratios: Evaluate how effectively a company uses its assets.
o Asset Turnover Ratio: Revenue/Total Assets\text{Revenue} / \text{Total
Assets}Revenue/Total Assets
o Inventory Turnover Ratio: Cost of Goods Sold/Average Inventory\text{Cost of
Goods Sold} / \text{Average Inventory}Cost of Goods Sold/Average Inventory

Example:

For a company with the following financials:

 Current Assets: $50,000

 Current Liabilities: $25,000
 Net Income: $10,000
 Revenue: $100,000
 Total Assets: $200,000
 Shareholder's Equity: $150,000
 Total Debt: $50,000
 EBIT: $15,000
 Interest Expense: $5,000

The financial ratios are:

 Current Ratio: 50,000/25,000=2.050,000 / 25,000 = 2.050,000/25,000=2.0

 Net Profit Margin: 10,000/100,000=0.10 or 10%10,000 / 100,000 = 0.10 \text{ or }
10\%10,000/100,000=0.10 or 10%
 ROA: 10,000/200,000=0.05 or 5%10,000 / 200,000 = 0.05 \text{ or }
5\%10,000/200,000=0.05 or 5%
 ROE: 10,000/150,000=0.067 or 6.7%10,000 / 150,000 = 0.067 \text{ or }
6.7\%10,000/150,000=0.067 or 6.7%
 Debt-to-Equity Ratio: 50,000/150,000=0.3350,000 / 150,000 = 0.3350,000/150,000=0.33
 Interest Coverage Ratio: 15,000/5,000=3.015,000 / 5,000 = 3.015,000/5,000=3.0