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Profitability Ratios:

  1. Gross Profit Margin: This ratio measures the profitability of a company’s core operations by comparing gross profit to net sales. It indicates the efficiency of the company in managing production costs and pricing its products.

    Gross Profit Margin = (Net Sales – Cost of Goods Sold) / Net Sales

  2. Operating Profit Margin: This ratio evaluates a company’s profitability from its core operations, excluding interest and taxes. It measures how well the company generates profit from its sales before considering non-operating expenses.

    Operating Profit Margin = Operating Profit / Net Sales

  3. Net Profit Margin: Net profit margin assesses a company’s profitability after accounting for all expenses, including taxes and interest. It indicates the portion of revenue that translates into net income.

    Net Profit Margin = Net Income / Net Sales

  4. Return on Assets (ROA): ROA measures how effectively a company utilizes its assets to generate profits. It indicates the efficiency of asset management and the company’s ability to generate income relative to its total assets.

    ROA = Net Income / Average Total Assets

  5. Return on Equity (ROE): ROE evaluates the return on the shareholders’ equity investment. It indicates the profitability of the company relative to the shareholders’ investment.

    ROE = Net Income / Average Shareholders’ Equity

Activity Ratios:

  1. Inventory Turnover: This ratio measures the number of times a company’s inventory is sold and replaced during a specific period. It assesses the efficiency of inventory management and the ability to sell products.

    Inventory Turnover = Cost of Goods Sold / Average Inventory

  2. Accounts Receivable Turnover: This ratio evaluates how efficiently a company collects its accounts receivable. It measures the number of times the accounts receivable balance is collected and replaced during a specific period.

    Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable

  3. Asset Turnover: Asset turnover measures the efficiency of a company in utilizing its assets to generate sales. It indicates how well a company generates revenue from its total assets.

    Asset Turnover = Net Sales / Average Total Assets

Liquidity Ratios:

  1. Current Ratio: The current ratio measures a company’s ability to cover its short-term obligations with its short-term assets. It assesses the company’s liquidity and short-term solvency.

    Current Ratio = Current Assets / Current Liabilities

  2. Quick Ratio (Acid-Test Ratio): The quick ratio is a more stringent measure of liquidity that excludes inventory from current assets. It focuses on the company’s ability to meet short-term obligations without relying on inventory sales.

    Quick Ratio = (Current Assets – Inventory) / Current Liabilities

  3. Cash Ratio: The cash ratio measures a company’s ability to cover its short-term obligations with its cash and cash equivalents. It provides a more conservative assessment of liquidity.

    Cash Ratio = Cash and Cash Equivalents / Current Liabilities

These ratios provide valuable insights into a company’s profitability, operational efficiency, and liquidity. However, it’s important to compare these ratios with industry benchmarks and analyze trends over time for a comprehensive assessment of a company’s financial performance.