# Ratio Essay

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

*…show more content…*

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