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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:
 Liquidity Ratios
Ratio

Formula

Current Ratio  Current Assets/Current liabilities 
Quick or AcidTest Ratio  (Current Assets – Inventories)/ Current Liabilities 
Ratio

Formula

Debt to Equity Ratio  (Current + Longterm 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) 
 Productivity or Turnover Ratios
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 
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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