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Financial Ratios for Analysis

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Current Ratio

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Formula: Current Ratio=Current AssetsCurrent Liabilities\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}. Interpretation: Measures a company's ability to pay short-term obligations with short-term assets.

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Quick Ratio

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Formula: Quick Ratio=Current AssetsInventoryCurrent Liabilities\text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}}. Interpretation: Indicates a company's short-term liquidity without relying on inventory sales.

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Debt-to-Equity Ratio

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Formula: Debt-to-Equity Ratio=Total LiabilitiesShareholder’s Equity\text{Debt-to-Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Shareholder's Equity}}. Interpretation: Shows the proportion of equity and debt a company uses to finance its assets.

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Return on Equity (ROE)

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Formula: ROE=Net IncomeShareholder’s Equity\text{ROE} = \frac{\text{Net Income}}{\text{Shareholder's Equity}}. Interpretation: Measures profitability by revealing how much profit a company generates with the money shareholders have invested.

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Gross Profit Margin

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Formula: Gross Profit Margin=Gross ProfitRevenue\text{Gross Profit Margin} = \frac{\text{Gross Profit}}{\text{Revenue}}. Interpretation: Reflects the efficiency of a company in managing its labor and supplies in the production process.

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Operating Margin

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Formula: Operating Margin=Operating IncomeRevenue\text{Operating Margin} = \frac{\text{Operating Income}}{\text{Revenue}}. Interpretation: Measures the proportion of a company's revenue that is left over after paying for variable costs of production.

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Net Profit Margin

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Formula: Net Profit Margin=Net IncomeRevenue\text{Net Profit Margin} = \frac{\text{Net Income}}{\text{Revenue}}. Interpretation: Shows how much of each dollar earned by the company is translated into profits.

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Return on Assets (ROA)

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Formula: ROA=Net IncomeTotal Assets\text{ROA} = \frac{\text{Net Income}}{\text{Total Assets}}. Interpretation: Indicates how efficiently a company is using its assets to generate profits.

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Inventory Turnover

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Formula: Inventory Turnover=Cost of Goods SoldAverage Inventory\text{Inventory Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}. Interpretation: Measures how often a company's inventory is sold and replaced over a period.

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Accounts Receivable Turnover

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Formula: Accounts Receivable Turnover=Net Credit SalesAverage Accounts Receivable\text{Accounts Receivable Turnover} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}}. Interpretation: Assesses how efficiently a firm is collecting revenue from its credit customers.

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Asset Turnover Ratio

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Formula: Asset Turnover Ratio=Net SalesAverage Total Assets\text{Asset Turnover Ratio} = \frac{\text{Net Sales}}{\text{Average Total Assets}}. Interpretation: Reflects a company's ability to generate sales from its assets.

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Return on Investment (ROI)

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Formula: ROI=Net IncomeTotal Investment\text{ROI} = \frac{\text{Net Income}}{\text{Total Investment}}. Interpretation: Provides an understanding of the efficiency of an investment or to compare the efficiencies of several investments.

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Earnings Per Share (EPS)

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Formula: EPS=Net IncomeDividends on Preferred StockAverage Outstanding Shares\text{EPS} = \frac{\text{Net Income} - \text{Dividends on Preferred Stock}}{\text{Average Outstanding Shares}}. Interpretation: Indicates how much money a company makes for each share of its stock.

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Price-Earnings Ratio (P/E)

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Formula: P/E Ratio=Market Value per ShareEarnings Per Share\text{P/E Ratio} = \frac{\text{Market Value per Share}}{\text{Earnings Per Share}}. Interpretation: Indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings.

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Working Capital

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Formula: Working Capital=Current AssetsCurrent Liabilities\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}. Interpretation: Represents the short-term financial health and efficiency of a company.

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Interest Coverage Ratio

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Formula: Interest Coverage Ratio=Earnings Before Interest and Taxes (EBIT)Interest Expenses\text{Interest Coverage Ratio} = \frac{\text{Earnings Before Interest and Taxes (EBIT)}}{\text{Interest Expenses}}. Interpretation: Measures how easily a company can pay interest on its outstanding debt.

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Debt Service Coverage Ratio (DSCR)

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Formula: DSCR=Net Operating IncomeTotal Debt Service\text{DSCR} = \frac{\text{Net Operating Income}}{\text{Total Debt Service}}. Interpretation: Evaluates a company's ability to cover its debt payments with its net operating income.

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Cash Ratio

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Formula: Cash Ratio=Cash and Cash EquivalentsCurrent Liabilities\text{Cash Ratio} = \frac{\text{Cash and Cash Equivalents}}{\text{Current Liabilities}}. Interpretation: Indicates a company's ability to repay its short-term debt with cash or near-cash resources.

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Times Interest Earned

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Formula: Times Interest Earned=Earnings Before Interest and Taxes (EBIT)Interest Expense\text{Times Interest Earned} = \frac{\text{Earnings Before Interest and Taxes (EBIT)}}{\text{Interest Expense}}. Interpretation: A metric used to measure a company's ability to meet its debt obligations.

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Dividend Yield

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Formula: Dividend Yield=Annual Dividends per SharePrice per Share\text{Dividend Yield} = \frac{\text{Annual Dividends per Share}}{\text{Price per Share}}. Interpretation: Indicates how much a company pays out in dividends each year relative to its stock price.

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