Financial Ratios

Current Ratios. The Current Ratio is one of the best known measures of financial strength. It is figured as shown below:

                        Total Current Assets
Current Ratio = ____________________
                        Total Current Liabilities

Quick Ratios. The Quick Ratio is sometimes called the "acid-test" ratio and is one of the best measures of liquidity. It is figured as shown below:

                        Cash + Government Securities + Receivables
Quick Ratio = _________________________________________
                                    Total Current Liabilities



Working Capital. Working Capital is more a measure of cash flow than a ratio. The result of this calculation must be a positive number. It is calculated as shown below:
Working Capital = Total Current Assets - Total Current Liabilities

Gross Margin Ratio
                              Gross Profit
Gross Margin Ratio = _______________
                                     Net Sales

(Gross Profit = Net Sales - Cost of Goods Sold)
Net Profit Margin Ratio
                                      Net Profit Before Tax
Net Profit Margin Ratio = _____________________
                                              Net Sales
Inventory Turnover Ratio
This ratio reveals how well inventory is being managed. It is important because the more times inventory can be turned in a given operating cycle, the greater the profit. The Inventory Turnover Ratio is calculated as follows:
                                                        Net Sales
Inventory Turnover Ratio = ___________________________
                                          Average Inventory at Cost

Inventory Turnover Ratio

                                                Cost of Goods Sold
Inventory Turnover Ratio =___________________________
                                      Average Inventories

Accounts Receivable Turnover Ratio
This ratio indicates how well accounts receivable are being collected. If receivables are not collected reasonably in accordance with their terms, management should rethink its collection policy. If receivables are excessively slow in being converted to cash, liquidity could be severely impaired. The Accounts Receivable Turnover Ratio is calculated as follows:
Net Credit Sales/Year
__________________ = Daily Credit Sales
365 Days/Year

                                                                  Accounts Receivable
Accounts Receivable Turnover (in days) = _________________________
                                                                   Daily Credit Sales