Question

(Liquidity Ratio, Asset Management Ratio, Debt Management Ratio, Market Value Ratios, Profitability Ratios) discuss what these particular ratios tell us about the performance of a company?

Answer 1

Liquity ratio is all about,  how quickly a company can convert its current assets into cash so that it can pay off its liability on a timely basis

I. Current Ratio = Current Assets/ Current Liability

II. Acid Test Ratio or Quick Ratio = Quick Assets/ Current Liability

i.e Quick Assets = Current Assets – Inventory – Prepaid Expenses

III. Absolute Liquidity Ratio = Cash + Marketable Securities / Current Liability

IV. Basic Defense Ratio = (Cash + Receivables + Marketable Securities) ÷ (Operating expenses +Interest + Taxes) ÷ 365

Asset management (turnover) ratios compare the assets of a company to its sales revenue.

Some of the ratios are below

• Accounts Payable Turnover Ratio
• Asset Turnover
• Capacity Utilization Rate
• Cash Conversion Cycle (Operating Cycle)
• Days Inventory Outstanding (DIO)
• Days Payable Outstanding (DPO)
• Days Sales Outstanding (DIO)
• Defensive Interval Ratio (DIR)
• Fixed Asset Turnover
• Inventory Turnover
• Receivable Turnover Ratio

Debt management ratio measures the firm’s ability to repay long-term debt by indicating the percentage of a company’s assets that are provided via debt.

Debt ratio = Total debt / Total assets

Price to Earnings = Market Value per Share / Annual Earnings per Share

Market Value Ratios

Market value ratios are also used to analyze stock trends

Price to Earnings = Market Value per Share / Annual Earnings per Share

PEG Ratio = Price to Earnings / Annual EPS Growth

Dividend Yield (%) = (Market Price per Share / Dividends per Share) x 100

Price to Book = Market Price per Share / Book Value per Share

Market to Book = Total Market Capitalization / Total Book Value

Profitability ratios used in analyzing a company's performance include gross profit margin (GPM), operating margin (OM), return on assets (ROA) , return on equity (ROE), return on sales (ROS) and return on investment (ROI)

Gross Margin = (Gross Profit) / (Sales)

Operating Margin = (Operating Income or Loss) / Sales

Net Margin = (Net Income or Loss) / Sales

Free Cash Flow Margin = (Free Cash Flow) / Sales

Return on Assets = (Net Income + Aftertax Interest Expense) / (Average Total Assets)

Return on Equity = (Net Income) / (Average Shareholders' Equity)

Cash Return on Assets = Cash Flow From Operations / CFO / Average Total Assets)

The above ratios are used to analyse the company performance in each aspects.