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Lecture 6
This lecture is part of Chapter 3:
Evaluating a Company’s Performance
Today’s Lecture
Liquidity Ratios
Efficiency Ratios
Leverage Ratios
Profitability Ratios
Liquidity Ratios
Liquidity is a measure of how quickly an asset can
be converted to cash.
Current Ratio
Quick Ratio
Liquidity Ratios
Current Ratio:
Current Ratio:
It is defined as:
It is defined as:
Vice versa, larger than one mean that the company has
more debts than assets. If this is the case you’d better
hope they will not go out of business …
A B C D
Adding Ratios
E F G
So so..
Leverage Ratios
It is defined as:
So so too..
Profitability Ratios
Note: Though these are ratios they are often just called
margin which generally refers to the difference between a
certain cost and sales price (taken from the top).
Profitability Ratios
It is defined as:
The Net Profit Margin tells you how many cents out of
every dollar are actual profit and thus attributable to the
shareholders.
Liquidity Ratios
Current Ratio =
Current Liabilities
Current Assets - Inventories
Quick Ratio =
Current Liabilities
Efficiency Ratios
Leverage Ratios
Total Debt Total Debt
Ratio =
Total Assets
Debt Equity Total Debt
Ratio =
Total Equity
Margin =
Sales
Operating Profit Net Operating Income
Margin =
Sales
Net Profit Net Income
Margin =
Sales
Key Points of the Day
We have seen how various Ratios can give insight into the
performance, liquidity and profitability of a company