# Business Finance Ratios

This is a simple (no word count minimum, but needs to be answered clearly and concisely) question?

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In your opinion, which of the ratios are most important? Also, why is it important to perform a trend analysis of the ratios over a period of years?

__Liquidity Ratios__

Current ratio = Current assets/current liabilities

Quick ratio = (Current assets-Inventories)/current liabilities

In general, the higher the current and quick ratios, the greater the liquidity (also known as solvency) of the firm.

__Asset Management Ratios Inventory turnover ratio = sales/inventories__

DSO = Receivables / average sales per day

Fixed asset turnover ratio = sales/net fixed assets

Total assets turnover ratio = sales/total assets

Asset management ratios, specifically the inventory turnover ratio, the fixed asset turnover ratio, and the total asset turnover ratio provide insight into how efficiently (or effectively) the firm’s managers are utilizing the company’s asset base. Generally speaking, high turnover ratios mean the company is being run more efficiently.

__Debt Management Ratios__

Times interest earned ratio = EBIT/Interest

In the case of the debt ratio, a higher value means the firm relies on debt instruments (bonds or loans) to finance its asset base.

__Profitability Ratios__

Profit margin on sales = Net income/sales

Earning power ratio = EBIT/total assets

Return on Assets ratio = Net income/total assets

ROE = Net income/common equity

A high profit margin is positive, and suggests aggressive expense control. A high BEP ratio is also regarded as a positive indicator. BEP is a broad measure of the firm’s the profitability of assets.

__Market Value Ratios__

PE = Price per share/earnings

Cash flow = Price per share/cash flow per share

Book value = Common equity/shares outstanding

In general, higher P/E ratios are seen as a positive sign