LIQUIDITY Current Ratio Current Creditors want to see high

RATIOS (Measure to Assets/Current current ratio because if CL

check short Liabilities is rising faster, CR will fall
term solvency) and that could spell trouble
Shareholders dont want a
high current ratio. High
could mean money tied up
in excess.
Quick/Acid Current Assets- Could improve if
Test Ratio Inventories/Current ARs can be
(Measure of Liabilities collected and
firms ability to company can pay
pay off short- off CLs without
term obligations having to liquidate
without relying inventory.
on sale of
inventories).
ASSET Inventory Sales/Inventories High levels of inventory
MANAGEMENT Turnover Ratio *COGS/Inventories cause high NOWC, hurts
RATIOS (How quickly FCF and stock price.
the inventory is If it is low, is the firm
sold out, re- holding obsolete goods not
stocked or worth the stated value.
turned over).
Day Sales Receivables/Average High levels of receivables
Outstanding Sales per day causes high NOWC, hurts
(DSO)/Average OR FCF and stock price.
Collection Receivables/(Annual
Period (ACP) Sales/365)
(Average length
of time that the
firm must wait
 after making a
sale before
receiving cash).
Fixed Assets Sales/Net Fixed Issues might be if an old
Turnover Ratio Assets firm is compared to new
(how effectively firm as old firm will have
the firm uses higher ratio, new would be
P&E) affected by inflation.
Could also be high if cost of
FA were lower than other
firms in the industry.
Total Assets Sales/Total Assets If low, then the company Sales should be
Turnover Ratio might not be generating increased, some
(how effectively sufficient volume of assets should be
the firm uses business given its total sold.
TAs) asset investment.
DEBT Debt Ratio Total Liabilities/Total Creditors prefer low debt
MANAGEMENT (% of funds Assets ratio to give them cushion
RATIOS provided by in times of bankruptcy.
total liabilities) Stockholders want high
debt ratio as it magnifies
their returns.
But if its high, creditors will
be reluctant to lend more.
Debt to Equity Total Liabilities/Total
Ratio Assets- Total
(___$ of debt for Liabilities
every dollar of
equity)
Market Debt Total Liabilities/(Total It could increase if liabilities
Ratio Liabilities+ Market increase or stock prices
Value of Equity) fall. If stock prices fall,
 there is going to be a likely
decline in future cash
flows.
Times-Interest EBIT/Interest If a firm cant meet its
Earned Ratio Expense interest expense, it is prone
(TIE)/Interest to legal action.
Coverage If it is low, then there is a
Ratio relatively low margin of
(ability to meet safety.
interest charges
on debt)
EBITDA (EBITDA+ Lease If EBITDA declines,
Coverage Payments)/(Interest coverage will fall. If its low,
Ratio +Principal payments it could relate to high level
(shows fixed (loan of debt.
financial repayments*often
charges zero) +Lease
coverage) payments)
PROFITABILITY Net Profit Net income Could be low due to
RATIOS Margin/Profit available to common inefficient operations, high
(Combined Margin on stockholders/Sales interest expense.
effect of Sales
liquidity, asset
management
and debt on
operating
results)
*could be low
due to poor
asset utilization.
Operating EBIT/Sales
Profit Margin
(how a company
 is performing
with respect to
its operations
before the
interest
expense is paid)
Gross Profit Sales-COGS/Sales
Margin
(gross profit per
dollar of sales
before any
other expenses)
Basic Earning EBIT/Total Assets Could be low due to low
Power Ratio turnover ratios and low
(BEP) profit margin on sales.
(raw earning
power of the
firms assets
before the
influence of
taxes and
leverage)
Return on Net income Low due to low BEP and
Total Assets available to common high interest rates.
(ROA) stockholders/Total
Assets
Return on Net income Low due to high usage of
Common available to common debt
Equity (ROE) stockholders/Comm
on Equity (Total
Equity)
MARKET VALUE Price/Earnings Price per It is higher for firms with
RATIOS Ratio (P/E share/Earnings per strong growth prospects.
(measure the Ratio) share Lower for riskier firms
value of a (how much
companys stock investors are
relative to that willing to pay
of another per dollar of
company) reported profits)
Price/Cash Price per share/Cash It is higher for firms with
Flow Ratio flow per share strong growth prospects.
*CF = NI + Low means growth
Depreciation prospects are below
average and the risk is
above average.
Price/EBITDA Price per share /
Ratio EBITDA per share
Market/Book Market Price per They typically exceed 1.0
Ratio Share/Book Value meaning that investors are
(the ratio of a per share willing to pay more for
stock markets stocks than their
price to its book Book Value = accounting book values.
value) Common High rates of return on
Equity/Shares equity sell at higher book
Outstanding value.
Book value is the record of
the past, market price is
forward looking
incorporating investors
expectation of future cash
flows.

Common Size Statements:

Income Statement: % of Sales
Balance Sheet: % of Total Assets

DUPONT EQUATION:
Combines a firms profitability, asset efficiency and use of debt.
ROA = Profit Margin (NI/Sales) x Total Assets Turnover (Sales/TA)
Equity Multiplier = Total Assets/Common Equity high leverage have high equity multiplier
ROE = ROA x Equity Multiplier
DUPONT = ROE = Profit Margin (NI/Sales) x Total Assets Turnover (Sales/TA) x Equity Multiplier (TA/CE)