Financial Term

Liquidity Ratio
It is also called as short-term ratio. This ratio helps to understand the liquidity in a business
which is the potential ability to meet current obligations. This ratio expresses the relationship
between current assets and current assets of the business concern during a particular period.
The following are the major liquidity ratio:
Current ratio = Current assets / Current liabilities
Quick ratio = (Current assets – Inventories) / Current liabilities
solvency
= (Cash and equivalents + Marketable securities + Accounts receivable) / Current liabilities

Activity Ratio
It is also called as turnover ratio. This ratio measures the efficiency of the current assets and
liabilities in the business concern during a particular period. This ratio is helpful to
understand the performance of the business concern. Some of the activity ratios are given
below:
Accounts Receivable Turnover=Total Credit Sales/Accounts Receivable
Average Collection Period=365 Days/Accounts Receivable Turnover
Inventory Turnover=Total Annual Sales or Cost of Goods Sold/Inventory Cost
Days in Inventory=365 Days/Inventory Turnover
Solvency Ratio
It is also called as leverage ratio, which measures the long-term obligation of the business
concern. This ratio helps to understand, how the long-term funds are used in the business
concern. Some of the solvency ratios are given below:
Debt to equity = Total debt/ Total equity
Debt to assets = Total debt / Total assets
Interest coverage ratio = Operating income (or EBIT) / Interest expense
Profitability Ratio
Profitability ratio helps to measure the profitability position of the business concern.
Gross Margin = Gross Profit/Net Sales * 100
Operating Margin = Operating Profit / Net Sales * 100
Return on Assets = Net Income / Assets * 100
Return on Equity = Net Income / Shareholder Investment * 100