Liquidity Ratios:

Liquidity ratios attempt to measure a company’s ability to pay off

the short term debt obligations.

Biggest difference between each ratio is the type of the assets

used in the calculation.

1) Current Ratio: It is used to test a company’s liquidity

(referred to as its current or working capital position)

Current Ratio= Current Assets

Current Liabilities

In theory, the higher the current ratio, the better. The

ubiquitous current ratio, as an indicator of liquidity, is flawed
because it's conceptually based on the liquidation of all of a
company's current assets to meet all of its current liabilities. In
reality, this is not likely to occur. Investors have to look at a
company as a going concern. It's the time it takes to convert a
company's working capital assets into cash to pay its current
obligations that is the key to its liquidity.

2) Quick Ratio: Also called acid test ratio, is a liquidity

indicator that further refines the current ratio by measuring
the amount of the most liquid current assets there are to
cover current liabilities.

Quick Ratio= Cash & equivalents+ short term

investments+ Accounts Receivable

Current Liabilities

The quick ratio is more conservative than the current ratio

because it excludes inventory and other
 current assets, which are more difficult to turn into cash.
Therefore, a higher ratio means a more liquid current
position.

3) Cash Ratio: The cash ratio is an indicator of a company's

liquidity that further refines both the current ratio and the
quick ratio by measuring the amount of cash or cash
equivalents or invested funds there are in current assets to
cover current liabilities.

Cash Ratio= Cash+ Cash Equivalents+ Invested Funds

Current Liabilities

The cash ratio is the most stringent and conservative of the

three short-term liquidity ratios (current, quick and cash). It
only looks at the most liquid short-term assets of the
company, which are those that can be most easily used to
pay off current obligations. It also ignores inventory and
receivables, as there are no assurances that these two
accounts can be converted to cash in a timely matter to
meet current liabilities.

4) Cash Conversion Cycle: This liquidity metric expresses the

length of time (in days) that a company uses to sell
inventory, collect receivables and pay its accounts payable.
The cash conversion cycle (CCC) measures the number of
days a company's cash is tied up in the production and sales
process of its operations and the benefit it gets from
payment terms from its creditors. The shorter this cycle, the
more liquid the company's working capital position is. The
CCC is also known as the "cash" or "operating" cycle.
 CCC= DIO+ DSO- DPO

Where DIO= Days Inventory Outstanding

DSO= Days Sales Outstanding

DPO= Days payables outstanding

Profitability Indicator Ratios:

These ratios, much like the operational performance ratios,
give users a good understanding of how well the company
utilized its resources in generating profit and shareholder
value.

The long-term profitability of a company is vital for both the

survivability of the company as well as the benefit received by
shareholders.

1) Profit Margin Analysis: Basically, it is the amount of profit

(at the gross, operating, pretax or net income level)
generated by the company as a percent of the sales
generated. The objective of margin analysis is to detect
consistency or positive/negative trends in a company's
earnings. Positive profit margin analysis translates into
positive investment quality.

Gross Profit Margin= Gross Profit

Net Sales (Revenue)

The gross profit margin is used to analyze how
efficiently a company is using its raw materials, labor
and manufacturing-related fixed assets to generate
profits. A higher margin percentage is a favorable profit
indicator.

Operating Profit Margin= Operating Profit

Net Sales (Revenue)

By subtracting selling, general and administrative

(SG&A), or operating, expenses from a company's gross
profit number, we get operating income. Management
has much more control over operating expenses than
its cost of sales outlays. Thus, investors need to
scrutinize the operating profit margin carefully. Positive
and negative trends in this ratio are, for the most part,
directly attributable to management decisions.

A company's operating income figure is often the

preferred metric (deemed to be more reliable) of
investment analysts, versus its net income figure, for
making inter-company comparisons and financial
projections

Pretax Profit Margin= Pretax Profit

Net Sales (Revenue)

Again many investment analysts prefer to use a pretax

income number for reasons similar to those mentioned
for operating income. In this case a company has
access to a variety of tax-management techniques,
 which allow it to manipulate the timing and magnitude
of its taxable income.

Net Income Profit Margin= Net income

Net Sales (Revenue)

While undeniably an important number, investors can

easily see from a complete profit margin analysis that
there are several income and expense operating
elements in an income statement that determine a net
profit margin. It behooves investors to take a
comprehensive look at a company's profit margins on a
systematic basis.

2) Effective Tax Rate: This ratio is a measurement of a

company's tax rate, which is calculated by comparing its
income tax expense to its pretax income.

Effective Tax Rate= Income tax Expense

Pre-Tax Income

Peer company comparisons of net profit margins can be

problematic as a result of the impact of the effective tax rate
on net profit margins. The same can be said of year-over-
year comparisons for the same company. This circumstance
is one of the reasons some financial analysts prefer to use
the operating or pretax profit figures instead of the net profit
number for profitability ratio calculation purposes.

3) Return on Assets: The return on assets (ROA) ratio

illustrates how well management is employing the
 company's total assets to make a profit. The higher the
return, the more efficient management is in utilizing its asset
base.

Return-On-Assets= Net Income

Average Total Assets

4) Return-On-Equity: The return on equity ratio (ROE)

measures how much the shareholders earned for their
investment in the company. The higher the ratio percentage,
the more efficient management is in utilizing its equity base
and the better return is to investors.

Return-On-Equity= Net Income

Average Shareholders’ Equity

In general, financial analysts consider return on equity

ratios in the 15-20% range as representing attractive
levels of investment quality.

DEBT RATIOS:
These ratios give users a general idea of the company's overall
debt load as well as its mix of equity and debt. Debt ratios can be
used to determine the overall level of financial risk a company
and its shareholders face. In general, the greater the amount of
debt held by a company the greater the financial risk of
bankruptcy.

1) Debt Ratio: The debt ratio compares a company's total

debt to its total assets, which is used to gain a general
idea as to the amount of leverage being used by a
company. A low percentage means that the company is
less dependent on leverage, i.e., money borrowed from
and/or owed to others. The lower the percentage, the less
 leverage a company is using and the stronger its equity
position.

Debt Ratio= Total Liabilities

Total Assets

2) Debt-Equity Ratio: The debt-equity ratio is another

leverage ratio that compares a company's total liabilities
to its total shareholders' equity. This is a measurement of
how much suppliers, lenders, creditors and obligors have
committed to the company versus what the shareholders
have committed.

Debt-Equity ratio= Total Liabilities

Shareholders’ Equity

Like the debt ratio, this ratio is not a pure

measurement of a company's debt because it
includes operational liabilities in total liabilities.

3) Capitalization ratio: The capitalization ratio measures

the debt component of a company's capital structure, or
capitalization (i.e., the sum of long-term debt liabilities
and shareholders' equity) to support a company's
operations and growth.

Long-term debt is divided by the sum of long-term debt

and shareholders' equity. This ratio is considered to be
one of the more meaningful of the "debt" ratios - it
delivers the key insight into a company's use of leverage.

Capitalization ratio= Long-term Debt

 Long-term debt+ Shareholders’
equity

4) Interest Coverage Ratio: The interest coverage ratio is

used to determine how easily a company can pay interest
expenses on outstanding debt. The lower the ratio, the
more the company is burdened by debt expense. When a
company's interest coverage ratio is only 1.5 or lower, its
ability to meet interest expenses may be questionable.

Interest Coverage ratio = Earnings before

Interest and Taxes

Interest Expense

5) Cash Flow to Debt ratio: This coverage ratio compares

a company's operating cash flow to its total debt, which,
for purposes of this ratio, is defined as the sum of short-
term borrowings, the current portion of long-term debt
and long-term debt. This ratio provides an indication of a
company's ability to cover total debt with its yearly cash
flow from operations. The higher the percentage ratio, the
better the company's ability to carry its total debt.

Cash Flow to Debt Ratio= Operating Cash Flow

Total Debt

Operating Performance ratios:

These ratios look at how efficiently and effectively a
company is using its resources to generate sales and
increase shareholder value. In general, the better these
ratios are, the better it is for shareholders.
1) Fixed Asset Turnover: This ratio is a rough measure of
the productivity of a company's fixed assets (property,
plant and equipment or PP&E) with respect to generating
sales. The higher the yearly turnover rate, the better.

Fixed asset turnover ratio= Revenue

Property, Plant and Equipment

it's important to determine the type of company that you

are using the ratio on because a company's investment in
fixed assets is very much linked to the requirements of
the industry in which it conducts its business. Fixed assets
vary greatly among companies. For example, an internet
company, like Google, has less of a fixed-asset base than
a heavy manufacturer like Caterpillar. Obviously, the
fixed-asset ratio for Google will have less relevance than
that for Caterpillar.

2) Sales/Revenue per Employee: As a gauge of personnel

productivity, this indicator simply measures the amount of
dollar sales, or revenue, generated per employee. The
higher the dollar figures the better.

Sales/Revenue per employee= Revenue

Number of Employees
(Average)
Cash Flow Indicator Ratios:
1) Operating Cash Flow/Sales ratio: This ratio, which is
expressed as a percentage, compares a company's
operating cash flow to its net sales or revenues, which gives
investors an idea of the company's ability to turn sales into
cash.

Operating Cash Flow/Sales Ratio= Operating Cash

Flow

Net sales

The statement of cash flows has three distinct sections, each

of which relates to an aspect of a company's cash flow
activities - operations, investing and financing. In this ratio,
we use the figure for operating cash flow, which is also
variously described in financial reporting as simply "cash
flow", "cash flow provided by operations", "cash flow from
operating activities" and "net cash provided (used) by
operating activities.

2) Free Cash Flow/Operating cash Flow: The free cash

flow/operating cash flow ratio measures the relationship
between free cash flow and operating cash flow.

Free cash flow is most often defined as operating cash flow

minus capital expenditures, which, in analytical terms, are
considered to be an essential outflow of funds to maintain a
company's competitiveness and efficiency.
 Free Cash Flow/Operating Cash Flow= Free Cash Flow
(OCF-Capital Exp.)

Operating Cash Flow

3) Dividend Payout Ratio: This ratio identifies the

percentage of earnings (net income) per common share
allocated to paying cash dividends to shareholders. The
dividend payout ratio is an indicator of how well earnings
support the dividend payment.

The payment of a cash dividend is recorded in the statement

of cash flows under the "financing activities" section.

Dividend Payout Ratio= Dividends Per Common Share

Earnings per Share