17.4 buissness

Ratio

A measure used by companies to compare their liquidity, debts, profit, and overall business activity with other businesses in the same industry.

Liquidity Ratio

A measure of how quickly an asset can be turned into cash.

Current Ratio

A short-term liquidity ratio calculated by dividing current assets by current liabilities. It indicates how much current assets a company has for every dollar of current liabilities.

Acid Test Ratio

A short-term liquidity ratio calculated by dividing the sum of cash, accounts receivable, and marketable securities over current liabilities. A ratio between 0.5 and 1 is considered good, while less than 0.5 is considered bad.

Leverage (Debt) Ratio

A measure of how much a company relies on debt.

debt to owner equity

It is calculated by dividing total liabilities by owner's equity and multiplying by 100%. If the result is above 100%, it indicates more debt.

Profitability Ratios

Measures of how well a company generates profits by its resources.

Earnings per Share

Calculated by dividing net income (after tax) by the number of shares outstanding.

Return on Sales

Calculated by dividing net income (before tax) by net sales and multiplying by 100%.

Return on Equity

Calculated by dividing net income (after tax) by total owner's equity and multiplying by 100%.

Activity Ratios

Measures of how efficiently management is turning over inventory.

Inventory Turnover

Calculated by dividing the cost of goods sold by the average inventory.