# Financial Ratios

Let’s take a look at how some key ratios are calculated, and what each ratio can tell you about your business.

**Solvency Ratios**

**Current Ratio **— Current Assets divided by Current Liabilities. This indicates liquid assets available to cover current debt. **Quick Ratio **— Cash plus Accounts Receivable, divided by Current Liabilities. This is a more stringent version of the Current Ratio.

**Operational Efficiency Ratios**

**Days Sales in Inventory **— Average Inventory divided by Cost of Goods Sold, times 365. Indicates the number of days that can be handled with existing inventory.

**Inventory Turnover **— Sales divided by Inventory. Higher ratio indicates lower carrying costs.

**Accounts Receivable Turnover **— Sales divided by Accounts Receivable. In general the higher the turnover ratio the better.

**Average Sales Days Outstanding **— 365 divided by Accounts Receivable Turnover.

**Leverage Ratios**

**Equity Ratio **— Net Income divided by Owner’s Equity. The higher the ratio, the more willing investors would be to invest in the company.

**Debt Ratio **— Total Debt divided by Total Assets. In general, the less the company relies on debt for asset formation, the less risk.

**Debt to Equity Ratio **— Total Liabilities divided by Total Equity. The smaller the ratio, the greater the long-term solvency.

**Profitability Ratios**

**Net Income to Sales **— After-tax Profits divided by Annual Sales. This key profit ratio indicates the company’s profit as a percentage of sales.

**Gross Profit to Sales **— Pre-tax Profit divided by Sales. A downward trend in this ratio might indicate you need to raise prices to remain profitable.

**Operating Expense to Sales **— Accounts Payable divided by Annual Sales. Higher numbers indicate the use of suppliers to float operations.

**Return on Total Assets **— Net Profit divided by Total Assets, is a key indicator of profitability

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- Published:
- 29.07.09 / 9pm

- Category:
- Accounting

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- Accounting, Financial Ratios

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