CH5 Liquidity & Profitability Ratios

What is Liquidity?

Having enough cash to pay bills and meet unexpected needs.

What is Working Capital?

Current Assets − Current Liabilities.

What is the Current Ratio?

Current Assets divided by Current Liabilities

What does a higher Current Ratio indicate?

Greater short-term liquidity; compared against industry averages.

What is Profitability?

A company’s ability to earn satisfactory income.

What is the Profit Margin?

Net Income divided by Revenues — shows how much of each sales dollar becomes profit.

What is Asset Turnover?

Revenues divided by Average Total Assets — shows efficiency in using assets to generate sales.

What is Return on Assets (ROA)?

Net Income divided by Average Total Assets — combines profit margin and asset turnover.

What is Debt to Equity Ratio?

Total Liabilities divided Owner’s Equity — shows how assets are financed (creditors vs owners).

What is Return on Equity (ROE)

Net Income divided Average Owner’s Equity — measures profitability relative to owners’ investment.