- Return on Assets (ROA):
- Description: ROA assesses a company’s efficiency in utilizing its assets to generate profit.
- Formula: ROA = Net Income / Total Assets
- Example: A company with a net income of $800,000 and total assets valued at $4,000,000 would yield an ROA of 20%.
- Return on Equity (ROE):
- Description: ROE measures a company’s ability to generate profit from shareholders’ equity.
- Formula: ROE = Net Income / Shareholder’s Equity
- Example: With a net income of $600,000 and shareholder’s equity totaling $3,000,000, the ROE stands at 20%.
- Net Profit Margin:
- Description: Net Profit Margin indicates the proportion of revenue that translates into profit after expenses.
- Formula: Net Profit Margin = (Net Income / Revenue) * 100
- Example: If a company’s net income is $400,000 and revenue is $2,000,000, the net profit margin would be 20%.
- Current Ratio:
- Description: The Current Ratio evaluates a company’s liquidity by comparing its current assets to its current liabilities.
- Formula: Current Ratio = Current Assets / Current Liabilities
- Example: If a company holds $800,000 in current assets and owes $400,000 in current liabilities, the current ratio would be 2.
- Quick Ratio:
- Description: Quick Ratio assesses a company’s ability to meet short-term liabilities with its most liquid assets.
- Formula: Quick Ratio = (Current Assets – Inventory) / Current Liabilities
- Example: With current assets of $500,000, inventory valued at $100,000, and current liabilities of $200,000, the quick ratio would be 2.
- Debt-to-Equity Ratio:
- Description: The Debt-to-Equity Ratio indicates the proportion of debt and equity financing used by a company.
- Formula: Debt-to-Equity Ratio = Total Debt / Shareholder’s Equity
- Example: A company with $1,000,000 in total debt and $2,000,000 in shareholder’s equity would have a debt-to-equity ratio of 0.5.
- Interest Coverage Ratio:
- Description: Interest Coverage Ratio measures a company’s capacity to cover its interest expenses with its operating income.
- Formula: Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense
- Example: If a company’s EBIT is $700,000 and its interest expense is $100,000, the interest coverage ratio would be 7.
- Inventory Turnover Ratio:
- Description: Inventory Turnover Ratio gauges how efficiently a company manages its inventory by measuring how quickly it sells and replaces its inventory.
- Formula: Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
- Example: If the cost of goods sold amounts to $1,200,000 and the average inventory is valued at $240,000, the inventory turnover ratio would be 5.
- Accounts Receivable Turnover Ratio:
- Description: Accounts Receivable Turnover Ratio evaluates how effectively a company collects payments from customers within a specific period.
- Formula: Accounts Receivable Turnover Ratio = Revenue / Average Accounts Receivable
- Example: With annual revenue of $3,000,000 and average accounts receivable of $600,000, the accounts receivable turnover ratio would be 5.
- Gross Profit Margin:
- Description: Gross Profit Margin measures the percentage of revenue retained by a company after accounting for the cost of goods sold.
- Formula: Gross Profit Margin = (Gross Profit / Revenue) * 100
- Example: If a company’s gross profit amounts to $600,000 and revenue is $2,000,000, the gross profit margin would be 30%.