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