Concept Title: Ratios – Quick Reviews

It’s important to understand the different categories of ratios. It is the combined knowledge of all the groups of ratios that help in constructing an overall financial picture.

We will be using the following ratios to calculate the financial health of ODP. The main categories of ratios are:

  1. Liquidity Ratios

    2. Ratio

    Formula
    Current Ratio Current Assets/Current liabilities
    Quick or Acid-Test Ratio (Current Assets – Inventories)/ Current Liabilities

  2. Leverage Ratios

    3. Ratio

    Formula
    Debt to Equity Ratio (Current + Long-term liabilities)/ Stockholders Equity
    Debt to Assets Ratio Total Debts/ Total Assets
    Times Interest Earned Ratio EBIT/Interest Charge
    Fixed Charge Coverage Ratio (EBIT + Lease Payments + Rentals)/ (Interest + Lease payments + Rentals)

  3. Productivity or Turnover Ratios

    4. Ratio

    Formula
    Inventory turnover Sales/Average Inventory of Finished Goods
    Fixed Asset turnover Sales/Fixed Assets
    Total Asset Turnover Sales/Total Assets
    Average Collection period Accounts Receivable/(Total Credit Sales/365)
    Accounts receivable Turnover Annual Credit Sales/Accounts receivable

  4. Profitability Ratios

Ratio

Formula
Gross profit margin Gross profit/Sales
Operating profit margin Operating profit/Sales
Net profit margin Net Income/Sales
Return on Assets Net Income/Assets
Return on Equity Net Income/ Equity
Basic earning power ratio EBIT/Total Assets




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