Ratios - Formulas & Definitions/Uses Flashcards
Define the current ratio.
The current ratio measures a company’s ability to pay off short-term liabilities with current assets:
Current ratio = Current assets / Current liabilities
Define the acid test ratio.
The acid-test ratio measures a company’s ability to pay off short-term liabilities with quick assets:
Acid-test ratio = Current assets – Inventories / Current liabilities
Define the cash ratio.
The cash ratio measures a company’s ability to pay off short-term liabilities with cash and cash equivalents:
Cash ratio = Cash and Cash equivalents / Current Liabilities
Define the operating cash flow ratio.
The operating cash flow ratio is a measure of the number of times a company can pay off current liabilities with the cash generated in a given period:
Operating cash flow ratio = Operating cash flow / Current liabilities
Define the debt ratio.
The debt ratio measures the relative amount of a company’s assets that are provided from debt:
Debt ratio = Total liabilities / Total assets
Define the debt-to-equity ratio.
The debt to equity ratio calculates the weight of total debt and financial liabilities against shareholders’ equity:
Debt to equity ratio = Total liabilities / Shareholder’s equity
Define the interest coverage ratio.
The interest coverage ratio shows how easily a company can pay its interest expenses:
Interest coverage ratio = Operating income / Interest expenses
Define the debt service coverage ratio.
The debt service coverage ratio reveals how easily a company can pay its debt obligations:
Debt service coverage ratio = Operating income / Total debt service
Define the asset turnover ratio.
The asset turnover ratio measures a company’s ability to generate sales from assets:
Asset turnover ratio = Net sales / Average total assets
Define the inventory turnover ratio.
The inventory turnover ratio measures how many times a company’s inventory is sold and replaced over a given period:
Inventory turnover ratio = Cost of goods sold / Average inventory
Define the receivables turnover ratio.
The accounts receivable turnover ratio measures how many times a company can turn receivables into cash over a given period:
Receivables turnover ratio = Net credit sales / Average accounts receivable
Define the days sales in inventory ratio.
The days sales in inventory ratio measures the average number of days that a company holds on to inventory before selling it to customers:
Days sales in inventory ratio = 365 days / Inventory turnover ratio
Define the gross margin ratio.
The gross margin ratio compares the gross profit of a company to its net sales to show how much profit a company makes after paying its cost of goods sold:
Gross margin ratio = Gross profit / Net sales
Define the operating margin ratio.
The operating margin ratio compares the operating income of a company to its net sales to determine operating efficiency:
Operating margin ratio = Operating income / Net sales
Define the return on assets ratio.
The return on assets ratio measures how efficiently a company is using its assets to generate profit:
Return on assets ratio = Net income / Total assets
