A measure of both a company's efficiency and its short-term financial health. The working capital
ratio is calculated as:
Working Capital = Current Assets- Current Liabilities
Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the
company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient.
If a company's current assets do not exceed its current liabilities, then it may run into trouble paying
back creditors in the short term.
Measures short term liquidity, using very liquid assets (Cash, A/R, and marketable securities)
Quick Ratio may reveal there is an inventory problem.
Return On Assets (ROA)
If the interest expense/interest is not given, you can just use:
Net Earnings / Average total Assets
ROA indicates the return from using assets in the business
Return On Equity (ROE)
Indicates the return from using funds from shareholders in the business.
Gross Profit Ratio
The higher, the better because it indicates COGS expense were controlled or reduced.
The excess paid on investing in shares of another company
Good for the ratio to be lower than 50%.
Ex. If the Debt/Equity ratio was 10%, this means that for every $100 of equity used to acquire assets,
$10 of debt are used to acquire assets.
However, if the ratio is too low, it indicates that the company is not taking advantage of borrowing
ability, which makes the company underleveraged.
Financial Expense can also mean Interest (if the interest is not specifically given)
Times Interest Earned
It measures the company’s ability to pay interest from operating income before interest and taxes.
Balance Sheet Statement of Financial Position
Income Statement Statement of Earnings
Income Tax Expense Provision of Taxes