Financial Ratios

Operating Margin - a measurement of what proportion of company's revenue is left over, before taxes, after covering all variable costs of its operations (wages, raw materials, etc.). Shows if company is able to pay for its fixed costs.

Profit Margin - an indicator of a company's pricing policies and its ability to control costs. Low profit margin indicates high risk, that a decline in sales will erase profits and result in loss.

Fixed Asset Turnover - indicates how well the business is using its fixed assets to generate sales. Declining ratio may indicate that the business is over-invested in plant, equipment, or other fixed assets.

Asset Turnover - measures the efficiency of a company's use of its assets in generating sales revenue/income.

Current Ratio - measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firm's current assets to its current liabilities. Acceptable current ratios vary from industry to industry, but if current liabilities exceed current assets (the current ratio < 1), then the company may have problems meeting its short-term obligations; if the current ratio is too high, then the company may not be efficiently using its current assets.

Quick Ratio - measures whether there are enough current assets to cover current liabilities. This ratio indicates a company's capacity to maintain operations as usual with current cash or near cash reserves in bad periods.

Acid Test Ratio - shows the company's readiness to cover immediately current liabilities.

Debt-to-Equity (D/E) - indicates relative proportion of equity and debt used to finance a company's assets. This ratio is also known as Risk, Gearing or Leverage.

Debt-to-Assets (D/A) - measures a company's solvency, i.e. ability to cover its long-term fixed expenses and to accomplish long-term expansion and growth.

Return-on-Assets (ROA) - shows how profitable a company's assets are in generating revenue.

Return-on-Equity (ROE) - measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners.