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Financial Ratios For MT

The document outlines various financial ratios used to assess a company's liquidity, solvency, turnover, profitability, and capital efficiency. Each ratio is accompanied by its formula and meaning, providing insights into the firm's financial health and operational effectiveness. Key ratios include the Current Ratio, Debt to Equity Ratio, Inventory Turnover, Gross Profit Margin, and Return on Capital Employed.

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2 views3 pages

Financial Ratios For MT

The document outlines various financial ratios used to assess a company's liquidity, solvency, turnover, profitability, and capital efficiency. Each ratio is accompanied by its formula and meaning, providing insights into the firm's financial health and operational effectiveness. Key ratios include the Current Ratio, Debt to Equity Ratio, Inventory Turnover, Gross Profit Margin, and Return on Capital Employed.

Uploaded by

rubeljvj
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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1.

Liquidity Ratios
Ratio Formula Meaning

Shows if a firm can pay short-


Current Current Assets /
term liabilities with short-term
Ratio Current Liabilities
assets. A ratio > 1 is usually good.

Quick (Current Assets - Stricter than the current ratio;

Ratio (Acid Inventory) / Current excludes inventory which may

Test) Liabilities not be easily liquidated.

(Cash + Marketable Extremely conservative; measures

Cash Ratio Securities) / Current the ability to pay off liabilities

Liabilities with only cash and equivalents.

2. Solvency Ratios (Leverage Ratios)

Ratio Formula Meaning

Total Debt / Indicates the proportion of debt


Debt to
Shareholders’ used to finance the company.
Equity Ratio
Equity Lower is generally safer.

Interest Measures how many times a


EBIT / Interest
Coverage company can cover its interest
Expense
Ratio expenses. Higher is better.

Shows what proportion of assets


Total Liabilities /
Debt Ratio is financed by debt. A higher ratio
Total Assets
implies more leverage.

3. Turnover Ratios (Activity Ratios)


Ratio Formula Meaning

How quickly inventory is sold.


Inventory Cost of Goods Sold
High turnover means efficient
Turnover / Average Inventory
inventory management.

Net Credit Sales / Shows how effectively a firm


Receivables
Average Accounts collects credit sales. Higher is
Turnover
Receivable better.

Asset Net Sales / Average Indicates how well assets are

Turnover Total Assets used to generate revenue.

Cost of Goods Sold


Payables Shows how fast the company
/ Average Accounts
Turnover pays its suppliers.
Payable

4. Profitability Ratios
Ratio Formula Meaning

Measures profitability after


Gross Profit (Gross Profit / Net
direct costs (like materials and
Margin Sales) × 100
labor).

Profitability after operating


Operating (Operating Profit /
expenses but before interest
Profit Margin Net Sales) × 100
and taxes.

Net Profit (Net Profit / Net


Final bottom-line profitability.
Margin Sales) × 100

Return on Net Income / Shows how profitable the

Assets (ROA) Average Total Assets company is in using its assets.


Ratio Formula Meaning

Indicates how well the


Return on Net Income /
company generates profits for
Equity (ROE) Shareholders’ Equity
shareholders.

5. Ratios Based on Capital Employed


Ratio Formula Meaning

Shows how efficiently capital


Return on Capital EBIT / Capital
is used to generate operating
Employed (ROCE) Employed
profits.

Net Sales / Indicates how efficiently


Capital Turnover
Capital capital is used to generate
Ratio
Employed revenue.

Measures how well the


Fixed Asset Net Sales / Net
company uses fixed assets to
Turnover Fixed Assets
generate sales.

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