The Current Ratio - Essay Example

In the example, this year's quick ratio is 0.4:1, which means that the company's liquid assets are at four-tenths of the value of its current liabilities. The company will not be able to pay current debts with its current liquid assets.

3. Debt Ratio

     The debt ratio measures the percentage of total funds in the business provided by its creditors. The formula is: (total debt) / (the total assets).

4. Debt to Net-Worth Ratio

     The debt to net-worth ratio measures how much the company is in debt. This ratio compares what the business owes to what it owns. It is a measure of the company's ability to meet both its creditor and owner obligations in case of liquidation. The formula is (total debt or liabilities) / (tangible net worth).

5. Inventory Turnover Ratio

     The company's inventory turnover ratio measures the number of times the inventory is sold out, or “turned over”, in a year. This ratio describes whether business inventory is understocked, overstocked, or obsolete. The formula is (cost of goods sold) / (cost of the average inventory).

6. Average Collection Period

     The company's average collection period ratio describes the average number of days it takes customers to pay bills. The formula is: (days in accounting period) / [(net sales) / (accounts receivable)].

7. Net Sales to Working Capital Ratio

     The net-sales to working-capital ratio measures how many dollars in sales the business makes for every dollar of working capital, where working capital = current assets - current liabilities. This ratio tells you how efficiently working capital is being used to generate sales. The formula is: (net sales) / [(current assets)- (current liabilities)].

8. Net Profit on the sales ratio

     The net profit on sales ratio (also called the profit margin on sales) measures the company's profit per dollar of sales. The computed percentage shows the number of cents of each sales dollar remaining after deducting all expenses and income taxes. The formula is: (net profit) / (net sales).

9. Net profit to equity ratio

     The net profit to equity ratio (the return on net worth ratio) measures the rate of return on investment. Since it reports the percentage of the investment in the business that is being returned through profits annually, it is one of the most important indicators of a company's profitability. The formula is: (net profit) / (owner's equity).