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Business Finance Ratios

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In your opinion, which of the ratios are most important?  Also, why is it important to perform a trend analysis of the ratios over a period of years?

Liquidity Ratios
Current ratio = Current assets/current liabilities
Quick ratio = (Current assets-Inventories)/current liabilities

In general, the higher the current and quick ratios, the greater the liquidity (also known as solvency) of the firm.

Asset Management Ratios Inventory turnover ratio = sales/inventories
DSO = Receivables / average sales per day
Fixed asset turnover ratio = sales/net fixed assets
Total assets turnover ratio = sales/total assets

Asset management ratios, specifically the inventory turnover ratio, the fixed asset turnover ratio, and the total asset turnover ratio provide insight into how efficiently (or effectively) the firm’s managers are utilizing the company’s asset base. Generally speaking, high turnover ratios mean the company is being run more efficiently.

Debt Management Ratios
Times interest earned ratio = EBIT/Interest

In the case of the debt ratio, a higher value means the firm relies on debt instruments (bonds or loans) to finance its asset base.

Profitability Ratios
Profit margin on sales = Net income/sales
Earning power ratio = EBIT/total assets
Return on Assets ratio = Net income/total assets
ROE = Net income/common equity

A high profit margin is positive, and suggests aggressive expense control. A high BEP ratio is also regarded as a positive indicator. BEP is a broad measure of the firm’s the profitability of assets.

Market Value Ratios
PE = Price per share/earnings
Cash flow = Price per share/cash flow per share
Book value = Common equity/shares outstanding

In general, higher P/E ratios are seen as a positive sign

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