Chapter 5

Financial Ratio

a number that expresses the value of one financial variable to another

Current Ratio

compares all the current assets of the firm with all the company's current liabilities

Liquidity Ratio

indicate how quickly and easily a company can obtain cash for its needs

The return on assets (ROA) ratio

indicates how much income each dollar of assets produces on average. It shows whether the business is employing its assets effectively

The Quick Ratio

is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets

Asset activities ratios

measure how efficiently a company uses its assets

Debt Ratios

measure how much a company owes to others

Profitability Ratio

measure how much company revenue is eaten up by expenses, how much a company earns relative to sales generated, and the amount earned relative to the value of the firm's assets and equity

Market Value Ratios

measure how the market value of a company's stock compares with its accounting values

Price to earning ratio

measures how much investors are willing to pay for claim to one dollar of the earnings per share.

Net Profit Margin Ratio

measures how much profit out of each sales dollar is left after all expenses are subtracted

Operating Profit Margin

measures how much profit remains out of each sales dollar after all the operating expenses are subtracted

Gross Profit Margin

measures how much profit remains out of each sales dollar after the cost of the goods sold is subtracted

The return on equity (ROE) ratio

measures the average return on the firm's capital contributions from its owners. For a corporation that means the contributions of common stockholders. It indicates how many dollars of income were produced for each dollar invested by the common stockholders.

Debt to total assets ratio

measures the percentage of the firm's assets that is financed with debt

Times Interest Earned

often used to assess a company's ability to service the interest on its debt with operating income from the current period.

Average Collection Period

ratio measures how many days the company's credit costumers take to pay their accounts

Inventory Turnover

tells us how effectively the firm converts inventory to sales.