Important Ratios and Their Interpretation

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Important Ratios and Their Interpretation

Type | Name of Ratio | Calculation | What it Tells You | Market Test | Price Earnings Ratio (PE Ratio) | Market price per share Earnings per share | A measure of expected company growth. A high PE Ratio means investors believe the company has a higher earnings potential | Profitability | Financial Leverage | Average Total Assets Average Stockholders Equity | How are assets financed? Higher number means higher debt | Profitability | Total Asset Turnover | Sales Average Total Assets | Measures sales generated per dollar of assets. Higher generally means more efficient use of assets in generating sales. | Profitability | Net Profit Margin | Net Income Net Sales | How much of each sales dollar ends up as profit? Varies by industry and efficiency. | Profitability | Return on Equity | Net Income Average Stockholders Equity | How much profit was generated for each collar of SH Equity | Profitability | Gross Profit Percentage | Net Sales-COGS (Gross profit) Net Sales | What percent of sales is left over after inventory costs and other costs are paid and have profit | Liquidity | Receivables Turnover | Net Sales Average Accounts Receivable | How many times were average receivables collected? Higher turnover is faster and fewer days. | Profitability | Return on Assets | Net Income + Interest Expense (net of tax) Average Total Assets (Cy + LY)/2 | Measures Profitability | Profitability | Earnings Per Share | Net Income (less Pfd Dividends) Ave # of Commons Shares Outstanding | Test and Measure of Profitability | Profitability | Quality of Income | Cash Flow From Operations Net Income | Ratio of greater than 1 would indicate a higher quality of earnings | Profitability | Profit Margin | Net Income Net Sales | % of each sale dollar…...

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