Other Important Financial Ratios
1. Activity ratios: cash conversion cycle, payables turnover, receivables turnover. These ratios give you an idea of what kind of revenues are produced by the firm’s assets and how efficiently the firm manages revenues and expenses.
2. Liquidity ratios: current ratio, quick ratio.These ratios give you an idea how easily the firm can meet its short-term obligations.
3. Solvency ratios: debt to equity, debt to assets, debt to total capital. These ratios tell you how well the firm is positioned to meet its long-term (more than one year or one business cycle) obligations.
4. Profitability ratios: gross margin, net margin, return on equity (ROE). These ratios tell you what kind of profits are produced by a company’s operations. Profits mean cash and cash creates value.
5. TOTAL ASSET TURNOVER
Total asset turnover describes the ability of a company to use its assets to generate sales. To calculate total asset turnover, divide net sales by the average total assets. For example, if net sales are $800,000 and the average total assets are $400,000, then the total asset turnover rate is $2.0. In general, the higher the total assets turnover, the more efficiently the company is using its assets. A high total asset turnover rate usually indicates a good investment.
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