RATIO ANALYSISReturn on Assets Ratio Thereturn on assets ratioprovides a standard for evaluating how efficiently financial management employs the average dollar invested in the firm's assets, whether the dollar came from investors or creditors Formula to calculate return on assets:Return on Assets = net profit before taxes / total assets

A lowreturn on assetsratio indicates that the earnings are low for the amount of assets.

Thereturn on assetsratiomeasures how efficiently profits are being generated from the assets employed.

A lowreturn on assetsratiocompared to industry averages indicates inefficient use of business assets.

Thecash debt coverage ratioshows the percent of debt that current cash flow can retire

Acash debt coverage ratioof 1:1 (100%) or greater shows that the company can repay all debt within one yearCASH DEBIT COVERAGE RATIOFormula to calculate cash debt coverage ratio: Cash Debt Coverage = (cash flow from operations - dividends) / total debt

Gross Profit Margin Ratio (Gross Margin Ratio) To calculategross profitsubtract cost of sales (variable costs) from sales. (i.e. gross profit = sales - cost of sales)

A lowgross profit margin ratio(or gross margin ratio) indicates that low amount of earnings, required to pay fixed costs and profits, are generated from revenues

A lowgross profit margin ratio(or gross margin ratio) indicates that the business is unable to control its production costs

Thegross profit margin ratio(or gross margin ratio) provides clues to the company's pricing, cost structure and production efficiency

Formula to calculate gross margin ratio: Gross Profit Margin Ratio = gross profit / salesReturn on Investment Ratio Thereturn on investment ratioprovides a standard return on investor's equity.Thereturn on investment ratiois also referred to asreturn on investmentorROIReturn on Investment Ratio = net profits before tax / shareholders equity

Thecurrent ratiois afinancial ratiothat measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firm'scurrent assetsto itscurrent liabilities.

It is expressed as follows: Current ratio The current ratio is an indication of a firm'smarket liquidityand ability to meet creditor's demands. Acceptable current ratios vary from industry to industry. If the current ratio is too high, then the company may not be efficiently using its current assets.

DEBT EQUITY RATIOLeverageis the relationship between debt financing and equity financing, also known as the debt-to-equity ratio.Equity is created by the personal funds of the business owner(s), and/or by the stockholders of shares in a corporation. As these funds have no claim on any of the assets of the business, the assets are available to be used as collateral for debt financing.

PROFITABILITY RATIOTheprofitability ratiosand other ratios arekey to understanding financial statements. ratio calculation spreadsheetsreduce time and effortin calculatingdecision makingratios

Theyreduce riskfor lenders and investors and enable owners, managers and consultants toincrease productivity and business profits.

Quick ratio TheAcid-testorquick ratioorliquid ratiomeasures the ability of a company to use itsnear cashorquick assetsto immediately extinguish itscurrent liabilities.Quick assetsinclude thosecurrent assetsthat presumably can be quickly converted to cash at close to theirbook values