Financial Account Equations and Ratios Flashcards
Current Ratio
Current Assets / Current Liabilities
measures the ability of the company to pay its short-term obligations with current assets. Although a ratio between 1.0 and 2.0 indicates sufficient current assets to meet obligations when they come due, many companies with sophisticated cash management systems have ratios below 1.0
Total Asset Turnover Ratio
Sales (operating) Revenue / Average total assets –> average is beginning balance + ending balance / 2
measures the sales generated per dollar of assets. A high ratio suggests that a company is managing its assets (the resources used to generate revenues) efficiently
Net Profit Margin
Net Income / Net Sales
measures how much of every sales dollar generated during the period is profit. A high or rising ratio suggests that the company is managing its sales and expenses efficiently
Return on Assets (ROA)
Net Income / Average Total Assets
measures how much the firm earned for each dollar of investment.
Gross Profit Percentage
Gross Profit / Net Sales
measures the excess of sales prices over the costs to purchase or produce the goods or services sold as a percentage
Receivables Turnover Ratio
Net Sales / Average Net Trade Accounts Receivable
measures the effectiveness of credit-granting and collection activities
