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110 PART 2 • STRATEGY FORMULATION
TABLE 4-6 A Summary of Key Financial Ratios
Ratio How Calculated What It Measures
Liquidity Ratios
Current Ratio Currentassets The extent to which a firm can meet its
Currentliabilities short-term obligations
Quick Ratio Currentassetsminusinventory The extent to which a firm can meet
Currentliabilitiees its short-term obligations without
relying upon the sale of its inventories
Leverage Ratios
Debt-to-Total-Assets Ratio Total debt The percentage of total funds that are
Total assets provided by creditors
Debt-to-Equity Ratio Total debt The percentage of total funds provided
Total stockholders’ equity by creditors versus by owners
Long-Term Debt-to-Equity Ratio Long term debt- The balance between debt and equity
Total stockholders’ equity in a firm’s long-term capital structure
Times-Interest-Earned Ratio Profits before interest and taxes The extent to which earnings can
Total interrest charges decline without the firm becoming
unable to meet its annual interest costs
Activity Ratios
Inventory Turnover Sales Whether a firm holds excessive
Inventory of finished goods stocks of inventories and whether a
firm is slowly selling its inventories
compared to the industry average
Fixed Assets Turnover Sales Sales productivity and plant and
Fixed assets equipment utilization
Total Assets Turnover Sales Whether a firm is generating a sufficient
Total assets volume of business for the size of its
asset investment
Accounts Receivable Turnover Annual credit sales The average length of time it takes a
Accounts receivable firm to collect credit sales (in percentage
terms)
Average Collection Period Accounts receivable The average length of time it takes a
Total credit sales/365 daays firm to collect on credit sales (in days)
Profitability Ratios
Gross Profit Margin Sales minus cost of goods sold The total margin available to cover
Sales operating expenses and yield a profit
Operating Profit Margin Earnings before interest and taxes (EBIT) Profitability without concern for taxes
Salles and interest
Net Profit Margin Net income After-tax profits per dollar of sales
Sales
Return on Total Assets (ROA) Net income After-tax profits per dollar of assets;
Total assets this ratio is also called return on invest-
ment (ROI)
Return on Stockholders’ Equity (ROE) Net income After-tax profits per dollar of stock-
Total stockholders’ equity holders’ investment in the firm
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