Key Ratios

Question 1

Current Ratio

Answer 1

Current Assets
CR= ——————
Current Liabilities

Question 2

What does the Current Ratio tell you?

Answer 2

The ability of a company to pay short term obligations with short term assets. The higher the rate, the more cushion the company has to pay it’s current obligations. Above 1.0 is good, but too high signals an inefficient use or resources.

Question 3

Earnings Per Share

Answer 3

Net Income
EPS ————————-
Weighted Avg. of No. of Shares of Stock Outstanding (starting outstanding shares + ending outstanding shares/2)

Question 4

Net Profit Margin

Answer 4

Net Income
NPM = —————————–
Net Sales (or Operating Revenues)

Question 5

What does Net Profit Margin tell you?

Answer 5

Out of each $1 of sales, how much of that dollar is profit. An increasing NPM could mean management is getting better or more efficient.

see page 123 of book for further ways to use this ratio