Key-ratios - Lecture notes 5 PDF

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Key ratios Chapter 2 Current ratio= current assets/current liabilities Measures a company’s ability to pay its short term obligations with current assets. Although a ratio between 1 and 2 indicates that sufficient current assets are available to meet obligations when they become due, many companies with sophisticated cash management systems have ratios below 1. Chapter 3 Total asset turnover ratio= Sale (or operating) revenues/ average total assets The total asset turnover ratio measures the sales generated from the use of assets. A high ratio suggests that the company is managing its assets (resources used to generate revenues) efficiently. Return on assets= Net earnings+ Interest expense (net of tax)/ average total assets The return on assets measures how much the company earned from the use of assets during the period. A high ratio suggests that the company its assets efficiently.

Chapter 4 Net profit margin ratio= net earnings/net sales revenue Net profit margin ratio measures how much each sales dollar generated in net earnings during the period. A high or rising ratio suggests that the company is managing its sales and expenses efficiently. Return on equity= Net earnings/average shareholder’s equity ((beg+end SE)/2) Return on equity measures how much the firm earned for each dollar of shareholder’s investment.

Chapter 7 Gross profit percentage= gross profit/net sales Measures the excess of sales prices over the costs to purchase or produce goods or services sold, as a percentage. Receivables turnover ratio=Net credit sales/ average net trade receivables ((beg TR+end)/2) The receivables turnover ratio measures the effectiveness of credit granting and collection activities.

Chapter 8 Inventory turnover ratio= cost of sales/average inventory The inventory turnover ratio measures the efficiency of inventory management. It reflects how many times the average inventory was produced and sold during the period....