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Formula Current Assets Current Liabilities Short term Investments Current Receivables Current Liabilities Net sales Average accounts receivable Cost of goods sold Average inventory 365 365 Net Sales Average total assets Total liabilities Total assets Total equity Total assets Total liabilities Total equity Income before interest expense and income taxes Interest Expense Net Income Net Sales Cost of goods sold Net Sales Net Income Average total assets Net income Preferred dividents Average common stockholders equity Net Sales

Measure of Short‐term debt‐paying ability (2:1 guideline) Immediate short‐term debt‐paying ability (1:1 guideline) Efficiency of collection (bigger is better) Efficiency of inventory management (higher is better) Liquidity of receivables (not exceeding 1 1/3 times the days Liquidity of inventory Efficiency of assets in producing sales Creditor financing and leverage (1 is all debt, .50 means half of the assets are through debt) Owner financing Debt versus equity financing Protection in meeting interest payments (large ratio means less risky to creditors) Net income in each sales dollar (10‐15% for appliance and 1% or 2% for supermarket) Gross margin in each sales dollar Overall profitability of assets Profitability of owner investment

Liquidity and Efficiency
Current Ratio Acid‐test ratio Accounts receivable turnover Inventory turnover Days’ sales uncollected Days’ sales in inventory Total Asset Turnover


Debt Ratio Equity Ratio Debt‐to‐equity ratio Times Interest Earned

Profit margin ratio Gross Margin Ratio Return on total assets Return on common stockholder’s equity

Book value per common share Basic earnings per share

Shareholders equity applicable to common shares Number of common shares…...

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...10 RATIOS YOU MUST KNOW Liquidity Ratios Current (working capital) ratio Acid-test (quick) ratio – Cash flow liquidity ratio Accounts receivable turnover Number of days’ sales in accounts receivable Inventory turnover – Total assets turnover 651 10 RATIOS YOU MUST KNOW Equity (Long-Term Solvency) Ratios Equity (stockholders’ equity) ratio – Equity to debt 10 RATIOS YOU MUST KNOW Profitability Tests – Return on operating assets Net income to net sales (return on sales or “profit margin”) $ Return on average common stockholders’ equity (ROE) – Cash flow margin Earnings per share – Times interest earned – Times preferred dividends earned 10 RATIOS YOU MUST KNOW Market Tests – Earnings yield on common stock Price-earnings ratio – Payout ratio on common stock – Dividend yield on common stock – Dividend yield on preferred stock – Cash flow per share of common stock Now, let’s look at Norton Corporation’s 1999 and 1998 financial statements. NORTON CORPORATION Balance Sheets December 31, 1999 and 1998 1999 Assets Current assets: Cash Accounts receivable, net Inventory Prepaid expenses Total current assets Property and equipment: Land Buildings and equipment, net Total property and equipment Total assets $ 165,000 116,390 281,390 346,390 $ $ 30,000 20,000 12,000 3,000 65,000 $ 1998 20,000 17,000 10,000 2,000 49,000 123,000 128,000 251,000 300,000 NORTON CORPORATION Balance Sheets December 31, 1999 and 1998 1999 Liabilities and......

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...Profitability ratios measure the company's use of its assets and control of its expenses to generate an acceptable rate of return Gross margin, Gross profit margin or Gross Profit Rate[7][8] [pic] OR [pic] Operating margin, Operating Income Margin, Operating profit margin or Return on sales (ROS)[8][9] [pic] Note: Operating income is the difference between operating revenues and operating expenses, but it is also sometimes used as a synonym for EBIT and operating profit.[10] This is true if the firm has no non-operating income. (Earnings before interest and taxes / Sales[11][12]) Profit margin, net margin or net profit margin[13] [pic] Return on equity (ROE)[13] [pic] Return on investment (ROI ratio or Du Pont Ratio)[6] [pic] Return on assets (ROA)[14] [pic] Return on assets Du Pont (ROA Du Pont)[15] [pic] Return on Equity Du Pont (ROE Du Pont) [pic] Return on net assets (RONA) [pic] Return on capital (ROC) [pic] Risk adjusted return on capital (RAROC) [pic] OR [pic] Return on capital employed (ROCE) [pic] Note: this is somewhat similar to (ROI), which calculates Net Income per Owner's Equity Cash flow return on investment (CFROI) [pic] Efficiency ratio [pic] Net gearing [pic] Basic Earnings Power Ratio[16] ......

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...The Use of Ratio Analysis Ratio analysis is a tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis to judge the performance of the company. Analyzing ratios is used to evaluate a company's present performance and its possible future performance. In a fact, interpretation of different accounting ratio lets the researcher fully understand the financial condition and performance of a business concern. Ratio itself is the comparison of one figure to another relevant figure. (http://www.investopedia.com/terms/r/ratioanalysis.asp) There are many ratios that you can use to analyze the financial health of a business. In this paper I will discuss four financial performance areas that I think are worth analyzing: Liquidity, profitability, solvency, and efficiency. I will discuss the strengths and weaknesses of using these ratios. First of all, Liquidity is the ability of the firm to convert assets into cash. It is also called marketability or short-term solvency. The liquidity of a business firm is usually of particular interest to its short-term creditors since the liquidity of the firm measures its ability to pay those creditors. Several financial ratios measure the......

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