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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:

  1. Liquidity Ratios
Ratio Formula
Current RatioCurrent Assets/Current liabilities
Quick or Acid-Test Ratio(Current Assets – Inventories)/ Current Liabilities
  • Leverage Ratios
Ratio Formula
Debt to Equity Ratio(Current + Long-term liabilities)/ Stockholders Equity
Debt to Assets RatioTotal Debts/ Total Assets
Times Interest Earned RatioEBIT/Interest Charge
Fixed Charge Coverage Ratio(EBIT + Lease Payments + Rentals)/ (Interest + Lease payments + Rentals)
  • Productivity or Turnover Ratios
Ratio Formula
Inventory turnoverSales/Average Inventory of Finished Goods
Fixed Asset turnoverSales/Fixed Assets
Total Asset TurnoverSales/Total Assets
Average Collection periodAccounts Receivable/(Total Credit Sales/365)
Accounts receivable TurnoverAnnual Credit Sales/Accounts receivable
  • Profitability Ratios
Ratio Formula
Gross profit marginGross profit/Sales
Operating profit marginOperating profit/Sales
Net profit marginNet Income/Sales
Return on AssetsNet Income/Assets
Return on EquityNet Income/ Equity
Basic earning power ratioEBIT/Total Assets