Liquidity Ratios

1- Current Ratio =
Current assets
Current Liabilities
Usage:
Ability to meet short-term obligations
Health Result:
High
Result analysis:
if the result is less than industry average, this means
that the firm has a great risk concerning its ca!abilites
to satisfy its obligations"
if the result is greater than industry average then:
- from creditor stand!oint, they like to see a high
current ratio because if the firm getting into
financial difficulty its li#uidity !osition $ill be
relativly $eak so, this ratio !rovides the best single
indicator of the e%tent to $hich th claims of short-
term creditors are covered by assets that are
e%!ected to be converted to cash fairly #uickly"
- from shareholder stand!oint, a high current ratio
could mean that the firm has a lot of money tied u!
in non!roductive assets,
Releated Ratios:
&one
'- (uick Ratio =
Current assets - Inv.
Current Liabilities
Usage:
a measure of the firms ability to !ay off short-term
obligations $ithout relying on the sale of inventories is
im!ortant"
Healthy Result:
)oderate
Result analysis:
if the result is less than industry average, this means
that the firm has a great risk concerning its ca!abilities
to satisfy its obligations"
this means that if the accounts receivables can be collected, the com!any can !ay off
its current liabilities $ithout having to li#uidate its inventory"
Related Ratios:
&one
Asset Ratios
* -+nventory ,urnover Ratio =
Sales
Inventory
Usage:
measures ho$ effectively the firm is managing its inventories"
Result analysis:
if the result is lo$er than the industry average, this suggest
that the firm is holding too much inventory"
-%cess inventory is un!roductive, and it re!resents an
investment $ith a lo$ or .ero rate of return"
Related Ratios:
Current ratio /0i#uidity ratio1
a lo$ turnover, $e must $onder $hether the firm is actually holding
obsolete goods not $orth thier stated value"
2- 3i%ed Assets ,urnover Ratio =
Sales
net F.A.
Usage:
measures ho$ effectively the firm uses its !lant and e#ui!ment"
Result analysis:
if the result fair com!ared $ith the industry average, indicating
that the firm is using its fi%ed assets as intensively as other
firm in the industry"
if the result is less than the industry average this means that the
firm doesnt utili.e its assets on a !ro!are mannar"
Related Ratios:
&one
4- ,otal Assets Ratio =
Total Sales
Total Assets
Usage:
measures the turnover of all the firms assets"
Result analysis:
if the ratio is some$hat belo$ the industry average, indicating that the
firm is not generating a sufficient volume of business given its total
asset investment"
Recommendations:
- 5ales should be increased"
- 5ome assets should be sold"
- A!!ly both solutions"
Related Ratios:
&one
Debt Ratios
6- ,otal 7ebt Ratio =
Total Liabilities
Total Assets
Usage:
it describes ho$ the firm is financed, i"e it measures the !ercentage
of funds !rovided by sources other than e#uity"
Healthy result:
8 and 0o$
Result analysis:
Creditors !refer lo$ debt ratios because the lo$er the ratio, the
greater the cushion against creditors losses in the event of li#uidation"
5tockholders, on the other hand, may $ant more leverage because it
magnifies e%!ected earnings"
Related Ratios:
&one
9- ,imes-interest-earned /,+-1 Ratio =
Earnings Before Interest and Taxes
(EBIT)
Interest Expense
Usage:
+t measures the ability of the firm to !ay interest, i"e" measures the
e%tent to $hich o!erating income can be decline before the firm is
unable to meet its annual interest cost"
Healthy result:
High
Result analysis:
Creditors !refer ,+- ratios because the lo$er the ratio, failure to meet
obligations can bring legal action by the creditors, !ossibly resulting in
bankru!tcy"
Related Ratios:
:rofit )argin Ratio =
Net Income
Total Sales
if the result is lo$ this might means that the interest cost is high, $hile
the net income is calculated after deducting the interest e%!enses from
gross income; this means that the !rofit margin goes lo$er"
Recommendations:
if the result is relatively high, this means that the firm can de!end on
more debt on financing its o!erations"
if the result is moderate, this means that the firm $ould face difficulties
if it attem!ted to borro$ additional funs"
Profitability Ratios
<- Return on Assets Ratio /R=A1 =
Net Income
Average Total Assets
Usage:
+t sho$s the return on assets !ercentage after interest and ta%es"
Healthy result:
High
Result analysis:
the ratio should go high" if the ratio goes lo$er, this means that the firm is
utili.ing its assets in a !ro!er $ay" also means that the firm is !aying more
interest e%!enses $hich decrease the net income"
Related Ratios:
turnover ratios
Recommendations:
if the result is relatively lo$, $e recommend that the firm should change its
financial strategy to be more de!endant on e#uity rather than debt"
also it should change its marketing strategy to increase its sales in less
o!erations cost to increase its net income"
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>- Return on -#uity Ratio /R=-1 =
Net Income
Average Owners E!"it#
Usage:
+t measures the !rofit !ercentage related to the e#uity invested" this ratio tells the
stockholders ho$ $ell they are doing in an accounting sense"
Healthy result:
High
Result analysis:
the ratio should go high" if the ratio goes lo$er, this means that the firm is
using more debt to finance its o!erations" this means that !aying more
interest e%!enses $hich decrease the net income"
Related Ratios:
&one
Recommendations:
if the result is relatively lo$, $e recommend that the firm should change its
financial strategy to be more de!endant on e#uity rather than debt"
also it should change its marketing strategy to increase its sales in less
o!erations cost to increase its net income"
1?- :rofit )argin Ratio =

Net Income
Total Sales
Usage:
+t measures the effectiveness of a firms o!erations, and goes on to sho$
the combined effects of li#uidity, assets management, and debt on
o!erating results"
gives !rofit !er dollar of sales !ercentage"
Healthy result:
8 and High
Result analysis:
the ratio should go high" if the ratio goes lo$er, this means that the firm is
using more debt to finance its o!erations" this means that !aying more
interest e%!enses $hich decrease the net income"
Related Ratios:
&one
Recommendations:
if the result is relatively lo$, $e recommend that the firm should change its
financial strategy to be more de!endant on e#uity rather than debt"
also it should change its marketing strategy to increase its sales in less
o!erations cost to increase its net income"
11- @asic -arnings :o$er Ratio =

Earnings Before Interest and
Taxes
Total Assets
Usage:
+t sho$s the ra$ earning !o$er of the firms assets, before influence of ta%es"
Healthy result:
8 and High
Result analysis:
if the ratio goes lo$ this consider as a result of lo$ turnover ratios and lo$
!rofit margin on sales"
Related Ratios:
+nventory ,urnover Ratio
3i%ed Assets ,urnover Ratio
Recommendations:
$hile the result goes lo$er, the firm should take necessary actions to im!rove
the turn over ratios $hich its results $ill be reflected on !rofit margin and on
basic earning !o$er ratio as $ell"
1'- -arnings !er 5hare Ratio =
Net Income
Average N"mber of $ommon
S%ares