| RATIO
INTERPRETATION |
| Ratio |
Computation |
Example |
Meaning |
| Current Ratio |
Current
Assets |
1.5 |
I have $1.50 in current assets
to pay every dollar in current liabilities |
| Current Liabilites |
| Quick Ratio |
Cash
+ Accounts Receivable |
0.85 |
I have $.85 in quick assets (liquid) to pay every dollar in
current liabilities |
| Current Liabilities |
| Debt to Equity |
Total
Liabilities |
2.75 |
For every dollar I (the owner)
put into the business, the creditors have put in $2.75 |
| Equity |
| Gross Profit Ratio |
Gross
Profit |
35% |
For every dollar of sales, I
make $0.35 at the gross profit level |
| Sales |
| Pre-Tax Profit Ratio |
PreTax
Profit |
3.00% |
For every dollar of sales, I
make $0.03 at the pre-tax profit level |
| Sales |
| Sales to Assets |
Sales |
2.6 |
For every dollar in assets
employed in my business, I generate $2.60 in sales |
| Total Assets |
| Return on Assets (ROA) |
PreTax
Profit |
10.00% |
For every dollar in assets employed in my business, I generate
$0.10 in profits |
| Total Assets |
| Return on Equity (ROI) |
PreTax
Profit |
22.00% |
For every dollar I've invested
in the business, I generate a return of $0.22 |
| Equity |
| Inventory Turnover |
Cost
of Goods Sold |
6 X |
On average, I turn my inventory
6 times a year |
| Inventory |
| Days in Inventory |
365
Days |
61 days |
On average, I turn my inventory every 61 days |
| Inventory Turnover |
| Accounts Receivable Turnover |
Sales |
9 X |
On average, I collect my
accounts receivable 9 times a year |
| Accounts Receivable |
| Collection Period |
365
Days |
41 days |
On average I collect my accounts receivable every 41 days |
| Accounts Receivable Turnover |
| Accounts Payable Turnover |
Cost
of Goods Sold |
7 X |
On average, I pay my accounts
payable 7 times a year |
| Accounts Payable |
| Payable Period |
365 |
52 days |
On average I pay my accounts payable every 52 days |
| Accounts Payable Turnover |
| Cash Flow to Profit |
Operating
Cash Flow |
34.00% |
For every dollar of profit
before tax, I generate $0.34 in cash flow |
| PreTax Profit |
| Cash Flow Debt Coverage |
Interest
Bearing Liabilities |
4.6 X |
It will take 4.6 years to retire existing interest bearing debt |
| Cash Flow Before Financing |
| Cash Flow Return on Assets |
Operating
Cash Flow |
8.70% |
For every dollar of assets, I
generate $0.087 in operating cash flow |
| Total Assets |
| Cash Return on Equity |
Operating
Cash Flow |
29.40% |
For every dollar of equity, I
generate $0.294 in operating cash flow |
| Equity |
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