The debt/equity ratio measures risk from the perspective of both the company and existing and potential lenders. The primary risk to the company is that both principal and interest payments on debt are fixed costs. They must be paid even if the company’s business and its cash flow decline. The other risk to the company [...]

Borrowing funds to finance expansion or modernization is a very positive strategy if the terms of the loan are not too burdensome. We certainly don’t want the interest rate to be too high. Perhaps more important, we want the benefits of the investments to be achieved before the debt becomes due. Many companies have experienced [...]

The inventory turnover ratio provides a helpful overview of how effectively the company manages what may be its most valuable asset, its inventory. It describes the relationship between the cost of the product sold over the course of a year and the average inventory the company maintained to support those sales. The formula for the [...]

These ratios and measures assist a company in evaluating its performance regarding the management of the credit function, as reflected in accounts receivable, and also the management of inventory.
Days’ Sales Outstanding
Days’ sales outstanding measures the average number of days that the company is taking to collect accounts receivable from its customers. The formula is:

(Annual Revenue [...]

RATIOS ARE MATHEMATICAL CALCULATIONS THAT the company can use to evaluate its performance. They help the company to determine whether trends are improving or deteriorating. They are calculated by comparing two numbers with each other. The most valuable use that can be made of ratios is to compare the ratios for this year with the [...]

Liquidity measures are used to evaluate a company’s ability to pay its bills on a regular week-to-week or month-to-month basis. There are two commonly used ratios that help to evaluate this, the current ratio and the quick ratio.
Current Ratio
The current ratio compares current assets with current liabilities.

The specific ratio is:

(Cash + Marketable Securities + [...]

Financial ratios provide more of an overview. They help management to monitor the company’s performance over a period of time, perhaps a week or a month. In order to fully appreciate and properly use the financial ratios, it is important that the analyst:

Understand the business and its products
Analyze the company’s [...]