Summary of the liquidity and efficiency ratios
Liquidity Ratios
- Current Ratio: Measures a company’s ability to meet its short-term obligations with its current assets.
- Acid-Test Ratio (Quick Ratio): Measures a company’s ability to meet its short-term obligations with its most liquid assets.
- Cash Ratio: Measures a company’s ability to meet its short-term obligations with its cash and cash equivalents.
- Net Working Capital Ratio: Measures a company’s current assets available to meet its current liabilities.
Efficiency Ratios
- Accounts Receivable Turnover: Measures how quickly a company collects its accounts receivable.
- Inventory Turnover: Measures how quickly a company sells its inventory.
- Days’ Sales Uncollected: Measures the average number of days it takes a company to collect its accounts receivable.
- Days’ Sales in Inventory: Measures the average number of days it takes a company to sell its inventory.
- Total Asset Turnover: Measures how efficiently a company is using its assets to generate sales.
Other Ratios
- Debt Ratio: Measures a company’s overall debt level.
- Equity Ratio: Measures a company’s overall equity level.
- Debt-to-Equity Ratio: Measures a company’s debt level relative to its equity level.
- Times Interest Earned: Measures a company’s ability to cover its interest expenses with its earnings before interest and taxes (EBIT).
- Profit Margin Ratio: Measures how much profit a company generates per dollar of sales.
- Gross Margin Ratio: Measures how much profit a company generates after deducting the cost of goods sold from its sales.
- Return on Total Assets (ROA): Measures how efficiently a company is using its assets to generate profits.
- Return on Common Stockholders’ Equity (ROE): Measures how efficiently a company is using its shareholders’ equity to generate profits.
- Book Value per Common Share: Measures the net asset value per common share.
- Basic Earnings per Share (EPS): Measures the company’s net income per common share.
- Price-Earnings Ratio (P/E Ratio): Measures the market value of a company’s stock relative to its earnings per share.
- Dividend Yield: Measures the annual cash dividends per share paid to shareholders relative to the market price of the stock.
These ratios can be used to assess a company’s financial health and performance. For example, a high current ratio indicates that a company is able to easily meet its short-term obligations. A high accounts receivable turnover ratio indicates that a company is able to collect its accounts receivable quickly. A high total asset turnover ratio indicates that a company is able to efficiently use its assets to generate sales.
It is important to note that these ratios should not be used in isolation. Rather, they should be compared to industry benchmarks and to the company’s own historical ratios to get a more complete picture of the company’s financial health and performance.