Popular Financial Ratios Objective Ratio Calculation Meaning Liquidity test Current ratio Current assets Tests the organization's Current liabilities ability to meet short- term obligations Acid test Current assets less inventorles Tests liquidity more Current liabilities accurately when inventories turn over slowly or are difficult to sell Leverage test Debt to assets Total debt The higher the ratio.the Total assets more leveraged the organization Times interest earned Profits before interest and taxes Measures how far profits Total interest charges can decline before the organization is unable to meet its interest expenses Operations Inventory turnover Sates The nigher the ratio.the test Inventory more efficiently inventory assets are being used Total asset turnover Sales The fewer assets used to Total assets achieve a given level of sales,the more efficiently management is using the organization's total assets Profitability Profit margin on sales Net profit after taxes ldentifies the profits that Total sales various products are Return on investment Net profit after taxes Measures the efficiency of Total assets assets to generate profits ©Prentice Hall,2002 20-11Popular Financial Ratios © Prentice Hall, 2002 20-11