Accounts Receivable -

e.g. $500,000 Sales Revenue/ $50,000 Accounts Receivable  = 10

This gives the Accounts Receivable Turnover Ratio.  Dividing this into 52 weeks gives the average sales credit period expressed in number of weeks.

52 weeks/10 Accounts Receivanle Turnover Ratio = 5.2 weeks

This is how long it takes you to convert accounts receivable into cash.

Inventory Turnover

e.g.   $ 300,000 Cost of Goods Sold /$70,000 stock in hand = 4.285 times

This is the Stock Turnover Ratio. Dividing this ratio into 52 weeks gives the average stock holding period expressed in number of weeks.

52 weeks/4.285 Stock Turnover Ratio = 12.135 weeks

Solvency

The Current Ratio: Test for Short-Term Solvency

The current ratio is used to test the short-term liability-paying ability of a business. It is calculated by dividing the total current assets by total current liabilities in a company's most recent balance sheet.

e.g. $141,700 Current Assets/$65,000 Current Liabilities = 2.18

This translates to a Current Ratio of 2.18 to 1.00

The general rule or standard is that the current ratio for a business should be 2 to 1 or higher. Most businesses find that  this minimum current ratio is expected by their creditors. The main reason is to provide a safety cushion of protection for the payment of short- term liabilities. A current ratio of 2 to 1 means there is $2 of cash or assets that could be converted into cash during the near future that will be available to pay each $1 of current liabilities that come due in roughly the same time period. Each dollar of short-term liability is backed up with two dollars of cash on hand or near-term cash inflows. The extra dollar of current assets provides a margin of safety.

The Acid Test Ratio (Quick Ratio)

Stock is many weeks away from being converted into cash and therefore is not as liquid as accounts receivable; it takes a lot longer to convert it into cash. Furthermore, there is no guarantee that all the stock will be sold.

A more severe measure of the short-term laibility-paying ability of a business is the acid test ratio which excludes stock. Only cash, marketable securities, investments (if any) and accounts receivable are counted as sources to pay the current liabilities of the business. This ratio is called the quick ratio because only cash and assets quickly convertible to cash are included in the amount available for paying current liabilities.It is a measure of how much cash and near-cash a business has to pay all its short-term liabilities.

e.g. $3,265 Cash + $5,000 Accounts Receivable/$8,125 Total Current Liabilities = 1.02  ( or 1.02 to 1)Acid Test Ratio

The general rule is that a company's or business's acid test ratio should be 1 to 1 or better.

Debt to Equity Ratio

Some debt is good, but too much is dangerous. The debt to equity ratio is an indicator of whether a business or company is using debt prudently, or perhaps has gone too far and is overburdened with debt that may likely cause problems.

e.g. $12,375 Total Liabilities/$23,125 Total Shareholders Equity = 0.54 Debt to Equity Ratio

This ratio tells us that the business is using $0.54 of liabilities in addition to each $1 of shareholders' equity in the business. Note that all liabilities (noninterest as well as interest-bearing, and both short-term and long-term)are included in this ratio, and that all shareholders' equity (invested capital and retained earnings)is included.

This business with its 0.54 to 1.00 debt to equity ratio would be viewed as moderately leveraged. Leverage refers to using the equity capital base to raise additional capital from outside sources.In other words, the business is using $1.54 of total capital for every $1.00 of equity capital. So the business has $1.54 of assets working for it for every dollar of equity capital in the business.

Most businesses stay below a 1 to 1 debt equity ratio. They don't want to take on too much debt

Profit and Return on Equity Ratios

Return on Sales

Making sales while controlling expenses is how a business makes profit. The Profit residual is expressed by the return on sales ratio, which is profit divided by sales revenue for the period.

e.g. $2,642 Net Income/$52,000 Sales Revenue = 5.08 Return on Sales Ratio

For every $100 of sales revenue the business earned $5.08 net income and had expenses of $94.92. Return on sales varies markedly from one industry to another. Some do well with only 1% or 2% return while others need more than 10% to justify the large amount of capital invested.

Return on Equity

Dividing the net annual income by shareholders' equity gives the return on equity (ROE) ratio.

e.g. $2,642 Net Income/$23,125 Shareholders' Equity = 11.4% Return on Equity Ratio.

By most standards, a 11.4% annual ROE would be acceptable but not impressive.However, everything is relative. ROE should be compared with industry-wide averages and with investment alternatives.