# Ratio Essay

1454 Words Dec 23rd, 2011 6 Pages
10 RATIOS YOU MUST KNOW
Liquidity Ratios
Current (working capital) ratio Acid-test (quick) ratio – Cash flow liquidity ratio Accounts receivable turnover Number of days’ sales in accounts receivable Inventory turnover – Total assets turnover

651

10 RATIOS YOU MUST KNOW
Equity (Long-Term Solvency) Ratios
Equity (stockholders’ equity) ratio – Equity to debt

10 RATIOS YOU MUST KNOW
Profitability Tests
– Return on operating assets Net income to net sales (return on sales or “profit margin”) \$ Return on average common stockholders’ equity (ROE) – Cash flow margin Earnings per share – Times interest earned – Times preferred dividends earned

10 RATIOS YOU MUST KNOW
Market Tests
– Earnings yield on common stock
NORTON CORPORATION 1999 Cash Accounts receivable, net \$ 30,000 17,000 20,000 10,000 12,000 65,000 42,000 494,000 140,000

We will use this information to calculate the liquidity ratios for Norton.

Beginning of year End of year Inventory Beginning of year End of year Total current assets Total current liabilities Sales on account Cost of goods sold

WORKING CAPITAL*
The excess of current assets over current liabilities.

12/31/99 Current assets Current liabilities Working capital \$ \$ 65,000 (42,000) 23,000

* While this is not a ratio, it does give an indication of a company’s liquidity.

CURRENT (WORKING CAPITAL) RATIO
#1
Current Ratio
Current Ratio

=

Current Assets Current Liabilities
\$65,000 \$42,000

=

=

1.55 : 1

Measures the ability of the company to pay current debts as they become due.

ACID-TEST (QUICK) RATIO
#2
Acid-Test Ratio = Quick Assets Current Liabilities
Quick assets are Cash, Marketable

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