ratio analysis

Profit Margin on Sales

How much profit we keep from each dollar of sales | ↑ Higher = more profitable (good) | ↓ Lower = less profit per sale

Return on Assets (ROA)

How well we use our assets to generate profit | ↑ Higher = efficient use of assets (good) | ↓ Lower = poor asset use

Return on Equity (ROE)

How much profit we generate for shareholders | ↑ Higher = strong return to owners (good) | ↓ Lower = weak return

Current Ratio

How easily we can pay current liabilities with current assets | ↑ Higher = safer (but too high = inefficient) | ↓ Lower = possible liquidity risk

Acid-Test (Quick) Ratio

How easily we can pay current liabilities with very liquid assets (no inventory) | ↑ Higher = strong short-term liquidity | ↓ Lower = risk of not covering bills

Debt to Equity Ratio

How much debt we have compared to what owners have invested | ↑ Higher = more risk (more debt) | ↓ Lower = less risk

Times Interest Earned Ratio

How easily we can pay interest with our income | ↑ Higher = safer (can cover interest easily) | ↓ Lower = risk of not paying interest

Equity Multiplier

How much we rely on debt vs equity to finance assets | ↑ Higher = more leverage (riskier) | ↓ Lower = less debt (safer)