Liquidity, profitability, and leverage ratio formulas used to evaluate a company's financial health, explained in plain language.
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- What does liquidity measure in financial analysis?
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A company's ability to pay short-term obligations with its most liquid assets.- Current Ratio formula
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Current Assets divided by Current Liabilities- What is a healthy Current Ratio?
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Generally between 1.5 and 3.0, though it varies by industry.- Quick Ratio formula
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(Current Assets minus Inventory) divided by Current Liabilities- Why exclude inventory from the Quick Ratio?
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Because inventory is harder to convert to cash quickly than other current assets.- Cash Ratio formula
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(Cash plus Cash Equivalents) divided by Current Liabilities- What is working capital?
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Current Assets minus Current Liabilities; represents cash available for day-to-day operations.- What does profitability measure?
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How much profit a company generates relative to its revenue, assets, or equity.- Gross Profit Margin formula
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(Revenue minus Cost of Goods Sold) divided by Revenue, expressed as a percentage- What does Gross Profit Margin reveal?
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How efficiently a company produces goods; how much of each revenue dollar remains after covering production costs.- Operating Profit Margin formula
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Operating Income divided by Revenue, expressed as a percentage- What does Operating Profit Margin measure?
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How much profit remains after paying operating expenses like wages, rent, and utilities, but before interest and taxes.- Net Profit Margin formula
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Net Income divided by Revenue, expressed as a percentage- What does Net Profit Margin show?
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The percentage of revenue that becomes profit after all expenses, interest, and taxes are paid.- Return on Assets (ROA) formula
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Net Income divided by Total Assets, expressed as a percentage
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