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Liquidity ratio:

Liquidity represents ones ability to pay its current


obligations or short-term debts with in a period less than one year. Liquidity
ratios, therefore, measures a companys liquidity position. The ratios are
important from the viewpoint of its creditors as well as management.
Types of liquidity ratios:
1: Current ratio
2: Quick ratio

Current ratio:
Current ratio is also known as short-term solvency ratio or
working capital ratio. Current ratio is use to assess the short-term financial
position of the business. In other words, it is an indicator of firms ability to
meet its short-term obligations.
Formula:
Current rstio = current assets/current liabilities
Quick ratio:
It is another measure of a companys liquidity. Quick ratio is
also known as liquid ratio or acid test ratio. It is the more stringent measure
of liquidity than current ratio.
Formula:
Quick ratio = liquid assets/current liabilities

Activity ratio/ Turnover ratio:


Activity ratios are set of financial ratios
used to measure the efficiency of various operations of a business. Activity
ratios measure the efficiency of the firm in using its resources. These ratios
also known as asset management ratios because these ratios indicate the
efficiency with which the assets of the firm are managed.
Types of activity ratios:
1: Debtor/ receivable turnover ratio
2: Stock / inventory turnover ratio
3: Assets turnover ratio
Debtor / receivable turnover ratio:
Receivable turnover ratio indicates
the frequency of conversion from debtors to cash normally in a year. It is also
suggests the extent of liquidity of debtors. Average collection period gives a
time period in which debtors are converted into cash.
Formula:
Debtor / receivable turnover ratio = credit sales/average
debtors=bills receivables
Stock / inventory turnover ratio:
It indicates how many times inventory
is sold and replaced in a financial year. In other words, the ratio gives the
frequency of conversion of inventory into cash in a given financial year.
Formula:
Stock / inventory turnover ratio = cost of goods sold/average
inventory

Assets turnover ratio:


It calculates the value of revenue achieved per
dollar of investment. A higher ratio indicates better asset management and
utilization and vice versa. The ratio also depends on the business to business
based on their profit margins.
Formula:
Asset turnover ratio = net revenue / assets

Profitibality:
A ratio that is used to access buisness ability to generate earnings as compared to its
expenses and other relevant costsearned during a specific period of time.

Types of profitiblity ratio:


It has six types:

1-Gross profit margin:


It indicates the ability of firm to control its cost of goods sold.

Formula:
GPM=gross profit/net sales

2-Operating profit margin:


It indicates the ability of companys managing and covering operating ability.

Formula:
OPM=earning before interest and expenses/net sales

3-Net profit margin:


It indicates the relationship etween net sales and net income.

Formula:
NPM=net income/net sales

4-Return on equity:
It indicates that how much you are generating return on awners
investement.

Formula:
ROE=net income/average equity

5-Return on assets:
It indicates the relationship between net income and total assets.

Formula:
ROA=net income/total assets

6-Operating efficiency:
It indicates the efficiency of firm by comparing operating expense to net sales.

Formula:
OE=operating expense/net sales

Leaverage ratio:
It tells how much capital comes in the buisness in the form of debt.

Types of leaverage ratio:


1-Debt ratio:
It indicates how much assets you have created with debt.

Formula:
Debt ratio=total liabilities/total assets

2-Equity ratio:
It indicates the relative proportion used to finance companys assets.

Formula:
Equity ratio=total equity/total assets

3-Debt to equity ratio:


It indicates the relationship between total liabilities and equity.

Fotmula:
Debt to equity ratio=total liabilities/totalequity

4-Interest coverage ratio:


it tells how easily a company pay interest on debt.

Formula:
Interest coverage ratio=operating income/annual interest expense

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