Ratios Definition Equation Comment Recommended Actions or Note

Liquidity ratios A firm is financially liquid if it is able to pay its bills on time
(1) Current Ratio(CR) We measure the firm Current Assets/Current For each 1 $ as a current liabilities, the company can cover it by XX as a current assets In case of CR < Industry AVG, CR can be improved by increasing
ability to meet its Liabilities = xx times Case 1 : Accepted : CR > industry average current assets or by decreasing current liabilities:
short term obligation From shareholder standpoint, a high current ratio could mean that the firm has a lot • Paying down debt
of money tied up in non-productive assets. • Acquiring a long-term loan (payable in more than 1 year’s time)
Does the business From creditor’s point of view, an encouraged indicator that the claims of short term • Selling a fixed asset
have enough current obligations are covered by assets that expected to be converted to cash fairly quickly. • Putting profits back into the business
assets to meet the Case 2 : Not Accepted : CR < industry average
payment schedule of The firm has a great risk in related to its ability to satisfy its short term obligations Note:-
current liabilities with which is critical indication for both creditors & shareholders. If Current ratio = 1 to 1.4 ........ Bad
a margin of safety? Less than 1 mean that net working capital (current asset - current liabilities) is If Current ratio = 1.5 to 2 ...…… Slightly bad to Good
negative, and this is unusual in a healthy firm, at least for most types of business If Current ratio > 2 .…….. Strong situation

(2) Quick ratio measures immediate (Current Assets- For each 1 $ as a current liabilities, the company can cover it by XX as a cash assets . A ratio of 1:1 means that the company can pay its bills without
(Acid Test Ratio) liquidity that firm can Inventory)/Current Case 1 :Accepted : Acid Test Ratio is high having to sell inventory
meet its short term Liabilities A higher number is preferred because it suggests a company has a strong ability to
obligations without = (Cash + Short term service short-term obligations.
relying upon the sale investment + A.R)/Current In general, quick ratios between 0.5 and 1 are considered satisfactory, as long as the
of its inventories Liabilities = xx times collection of receivables is not expected to slow

Case2 : Not Accepted : Acid Test Ratio is Low

less than average indicate liquidity issues

(3) Inventory turnover Measures how much COGS/Average Inventory = In case of production company : The company can produce and sell all inventory in xx It is a good indication of purchasing and production efficiency
inventory converted xx times times per year
to sales during a time In case of merchendising company : The company can purchase and sell all inventory You might expect a company with a fast moving goods inventory,
period in xx times per year such as a grocery store, to have a very high Inventory Turnover
In case of Service Company : No inventory Ratio. Conversely, a furniture store might have a low Inventory
Turnover Ratio
Case 1: Accepted : High Inventory turnover ratio or Inventory turnover > Industry
Average
A high ratio indicates inventory is selling quickly and that little unused inventory is
being stored which implies either strong sales and / or large discounts

If this have a very high value, we should check the storage area, may be it is not that
big which lead to a small inventory value

Case 2: Not Accepted : Low Inventory turnover ratio or Inventory turnover < Industry
Average
If the ratio is low, indicates inventory is selling slowly which implies weak sales or low
product quality

(4) Days in inventory Measures the number 365/inventory turnover = xx The company has ability to sell all inventory items during xx days on average This could be conducted for each product in the company, and for
of days’ worth of days the products that had extra Day’s of inventory, we could make
inventory that a Just in case I have more details in the case about inventory items, I can prepare some sales promotion to increase the Inventory turnover
company has on hand inventory analysis by item, so this is a limitation in the case
at any given time.
Case 1: Accepted:
A less number of days indicate inventory is selling quickly

Case 2: Not Accepted :

A more number of days indicate inventory is selling slow

(5) Receivable Measure how many Net Credit Sales / Average The company has ability to sell and collect all receivable balances xx times / year Sometimes the problem is not with inventory as the inventory
turnover times the company of Receivable = xx times turnover is quick but may be the liquidity problem is due to cash
transfers receivables Case 1: Accepted : collection
into cash during a A higher ratio indicates a shorter time between making a sale and collecting the cash.
time period You may need to step up your collection department ad here
If it exceed than 10, then you should check only the client satisfaction, because interfere the HR department for hiring new candidates in
collecting the money with this high ratio may cause to client dissatisfaction. collection department or tighten your credit policies such as
offering facilites for the early payments .
Case 2: : Not Accepted :
Low ratio mean long time of collecting cash Receivable turnover give us an indicator to evaluate collection
management in the firm.
(6) Average collection Measures the average 365/ Receivable turnover The company has ability to collect all receivable balances xx days Important for company performance evaluation.
period number of days it
takes the firm to Case 1: Accepted : This could be conducted on different customers and check which
collects its The goal as a business is to keep the number of days your accounts receivable are of them take extra period in collection period and decrease the
receivables. outstanding as low as possible. After all, you need the cash to build your company period of payment for them.
(increase cash flow), not finance your customers!

Case 2: Not Accepted:

A more number of days indicate collection is slow

Profitability ratios Measure the income or operating success of a company for a given period of time.
(1) Net profit margin Measuring how the Net Income / Net Sales = xx Each $100 as a net sales generate $ x as a return If the trend of net profit margin is increasing and at the same
firm controlling costs % time we have a problem in the inventory so the company has a
and earning Case 1: Accepted : problem in pricing .
reasonable profit Higher percentage is much preferred
margin? Profit margin has to be within the industry average , not much
Case 2: Not Accepted: higher or much lower UNLESS the company in the growth phase .
To evaluate if this % is low this could be because our selling price is low or we are not controlling
Management well our cost the profit margin is not that important, because the price is
performance guided by the market price, and also by time companies can’t
decrease the cost

(2) Investment To evaluate Net Sales / Average For each $1 as an investment(asset invested) generate $ x as a net sales Industry Average here is the most important to compare with.
Turnover Management Investment = xx times The industry type here is governs the investment tyurnover
performance Case 1: FMCG(Fast-Moving Consumer Goods) companies have a higher
for high turnover industry --> look for investment turnover, investment turnover but Patent companies have a lower
investment turnover
Case 2:
for low turnover industry --> look for profit margin
(3) ROI( Return On Measures the firm Profit margin * Investment Each $100 as an investment (asset invested) generate $ x as a return Trend analysis is useful to compare to ROI
Investment ) ability to turn assets Turnover = xx %
into profit. Case 1 : ROI can be FAKE ratio or factor as the management will work to
Higher percentage is much preferred decrese the average investment(working capital + non current
To evaluate assets) i.e. decrease the non currect assets such as not replacing
Management Case 2: the equipment so the eqipment is depreciated so it value will
performance If percentage is low, it means there’s poor management performance due to utilizing decrease , in this case the ROI is high but is not good for company
its assets in a inadequate way as the management work to improve his image only and not
replacing the equipment , we can detect this FAKE ROI from
Balance sheet ( see the equipment value for last three years, it
will be decreased so it is indication for FAKE ROI)

If the industry type imposes high profit share rather than high
turnover , then the company has two strategies :
(1) Cost Management strategy
(2)

we cut current liabilities from the total assets, because there is

certain part of the assets is not used in investment and used to
pay current liabilities for this we subtract current liabilities.

(4)Dividence Per To evaluate EPS*Payout Ratio = (Net Each shareholder

Share(DPS) Stockholder Income / No.of
performance Shares)*Payout Ratio = $ x / If the DPS trend decrease but the total investment trend is increased so the company
Share take the expansion strategy, this strategy can be a thread to the company because not
all people can read this situation accurately so the company need to announce such
strategy and assume that the stockholders are not expert . The announcement should
say : " The company has an investment agenda in the future with a direction to
expansion and to be regular in annual meeting or company news"

(5)Book Value Per To evaluate Total shareholder equity / If the DPS Tread decrease and the BVS Trend increase, this means that the company is
Share(BVS) Stockholder No.Of shares growing .
performance
If the DPS Tread decrease and the BVS trend decrease, this means that the company is
not stable and this is a big threat .

Solvency ratios 1- Ability to pay the long term liabilities

2- Ability to satisfy the shareholder and creditors
Capital Structure Increase % of Equity : Minimize risk , increase cost of capital
Debt % = Total Debt / Total Investment Increase % of Debt : Increase Risk, minimize cost of capital
Equity % = Total Equity / Total Investment
In the case, if the company has many risks so we need to select
the capital structure that with high % of equity to minimize the
risk

Leverage Measure the ability of total dept / total asset = xx Each $100 as total asset have been financed by $xx .
company to pay its %
loans to creditors