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Ratios Summary

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Ratio | Calculation | Explanation | ROSReturn on Sales | Net Income / Sales | A measure of how much profit was created for every dollar of sales | Turnover(asset turnover) | Sales / Total Assets | The total sales generated in a particular year divided by the value of total assets for the same periodMeasures the amount of “activity” taking place in a business (how active the assets are in generating sales)The higher the use of these assets (ex: plant & equipment), the higher the level of this activity | ROAReturn on Assets | Net Income / Total Assets | A measure of how much profit was created for the assets gathered | Leverage | Total Assets / Total Owners’ Equity | Measures how “big” of a company the managers have created using the owners’ investmnets | ROEReturn on Equity | Net Income / Owners’ Equity | A measure of how much profit was created with owners’ investmentsA smaller leverage # = owners’ own a greater portion of the assets | Current Ratio | Current Assets / Current Liabilities | Measure liquidity and reveal whether the firm can meet its debt for the coming year | Quick ratio/ Acid test | (Current Assets – Inventories) / Current Liabilities | (Current and Quick ratios measure ... ^^) | Debt to total Assets | Total Debt / Total Assets | Shows the degree of financial leverage |
Ratios & Measure of Perfomance – Summary
Chapter 5, Page 134

Financial ratios are computed from the balance sheet and income statements
12 Key Ratios help business owners assess financial health of their company
Organized into 4 areas: 1. Liquidity ratios 2. Leverage ratios 3. Operating ratios 4. Profitability ratios

Leverage: Leverage = Total Assets / Total Owners’ Equity
Measures how “big” of a company the maangers have created using the owners’ investments * A larger otal owner’s equity and a lower dependence on debt = lower

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