### ratio analysis

the process of calculating and analyzing financial ratios to assess the firm's performance and to identify actions needed to improve firm performance

### liquidity ratios

measure the relation between a firm's liquid (or current) assets and its current liabilities

### asset management ratios

measure how efficiently a firm uses its assets (inventory, accounts receivable, and fixed assets) as well as its accounts payable

### current ratio

measures the dollars of current assets available to pay each dollar of current liabilities

### quick ratios (acid-test)

measures a firm's ability to pay off short-term obligations without relying on inventory sales

### cash ratio

measures a firm's ability to pay short-term obligations with its available cash and marketable securities

### days' sales in inventory ratio

measure the number of days that inventory is held before the final product is sold

### average collection period (ACP)

measures the number of days accounts receivable are held before the firm collects cash from the sale

### accounts receivable turnover ratio

measures the number of dollars of sales produced per dollar of accounts receivable

### average payment period (APP)

measures the number of days that the firm holds accounts payable before it has to extend cash to buy raw materials

### accounts payable turnover ratio

measures the dollar cost of goods sold per dollar of accounts payable

### fixed asset turnover ratio

measures the number of dollars of sales produced per dollar of fixed assets

### sales to working capital ratio

measure the number of dollars of sales produced per dollar of net working capital

### total asset turnover ratio

measures the number of dollars of sales produced per dollar of total assets

### debt management ratios

measure the extent to which the firm uses debt (or financial leverage) versus equity to finance its assets

### debt-to-equity ratio

measures the dollars of debt financing used for every dollar of equity financing

### equity multiplier ratio

measures the dollars of assets on the balance sheet for every dollar of equity financing

### times interest earned ratio

measures the number of dollars of operating earnings available to meet each dollar of interest obligations on the firm's debt

### fixed-charge coverage ratio

measures the number of dollars of operating earnings available to meet the firm's interest dollars and other fixed charges

### cash coverage ratio

measure the number of dollars of operating cash available to meet each dollar of interest and other fixed charges that the firm owes

### profitability ratios

show the combined effects of liquidity, asset management, and debt management on the overall operating results of the firm

### basic earnings power ratio

measures the operating return on the firm's assets, irrespective of financial leverage and taxes

### return on assets (ROA)

measures the overall return on the firm's assets, inclusive of financial leverage and taxes

### return on equity (ROE)

measures the return on the common stockholder's investment in the assets of the firm

### dividend payout ratio

the percentage of net income available to common stockholders that the firm actually pays as cash to these investors

### market-to-book ratio

measures the amount that investors will pay for the firm's stock per dollar of equity used to finance the firm's assets

### book value per share

accounting based number reflecting the firm's assets' historical costs and value

### price-earnings ratio

measures how much investors are willing to pay for each dollar the firm earns per share of its stock

### DuPont analysis system

an analytical method that used the balance sheet and income statement to break the ROA and ROE ratios into component pieces

### common-size financial statements

dividing all balance sheet amounts by total assets and all income statement amounts by net sales

### internal growth rate

the growth rate a firm can sustain if it uses only internal financing (retained earnings) to finance future growth

### substantial growth rate

the growth rate a firm can sustain if it finances growth using both debt and internal financing such that the debt ration remains constant