Term

Definition
Owners Equity = Assets  Liabilities
(OE = A  L) 


Term

Definition
Current Ratio =
Current Assets
Current Liabilites 


Term
Current Ratio 
What Does It Mean? 

Definition
i.e. 0.35:1
for every $1 of shortterm debt, there is 35 cents to pay that debt 


Term
Solvency 
The Gearing Ratio


Definition
The Gearing Ratio =
Noncurrent Liabilities x 100
Owners' Equity 


Term
Gearing Ratio 
What Does It Mean? 

Definition
i.e. 47%
longterm debt as a % of owners' equity is 47%.
60% regarded satisfactory level of debt 


Term
Solvency 
The Gearing or Equity Ratio 

Definition
Gearing or Equity Ratio =
Total Liabilities x100
Total Assets 


Term
Gearing or Equity Ratio
What Does It Mean? 

Definition
should be the same as the industry average or lower 


Term
Solvency 
Debt to Equity Ratio 

Definition
Debt to Equity Ratio =
Total Liabilities x 100
Equitity Funds 


Term
Debt to Equity Ratio
What Does It Mean? 

Definition
high ratio indicated high geating and therefore a high risk  should be less than 100% 


Term
Profitability 
Gross Profit Ratio


Definition
Gross Profit Ratio =
Gross Profit x 100
Sales 


Term
Gross Profit Ratio 
What Does It Mean? 

Definition
i.e. 85%
85¢ out of every dollar of sales stays w/in the business and 15¢ of every dollar goes to pay for goods 


Term
Profitability 
Net Profit Ratio 

Definition
Net Profit Ratio =
Net Profit x 100
Sales 


Term
Net Profit Ratio 
What Does It Mean? 

Definition
i.e. 29%
for every $1 of sales, 29¢ stay in the business after all the expenses have been paid 


Term
Profitability 
Return on Owners Equity Ratio 

Definition
Return of Owners Equity Ratio =
Net Proftit x 100
Owners' Equity 


Term
Return on Owners Equity Ratio 
What Does It Mean? 

Definition
i.e. 43%
for every $1 of ownership in the business, the owner/investor is getting a return of 43¢ 


Term
Efficiency
Total Operating Expenses Ratio 

Definition
Total Operating Expenses Ratio =
Total Operating Expenses x 100
Sales 


Term
Efficiency
Accounts Receivable Tunrover Ratio 

Definition
Accounts Receivable Turnover Ratio =
Accounts Receivable
Average Sales per Day 


Term
Accounts Receivable Turnover Ratio
What Does It Mean? 

Definition
i.e. 80 days
it takes on average 80 days to collect customer debts.
 Effective business would ensure debts are repaid within 30 days



Term
Efficiency
Expense Ratio 

Definition
Expense Ratio =
Total Expenses x 100
Sales 


Term
Expense Ratio
What Does It Mean? 

Definition
used to determine the proportion of each dollar earned that is absorbed by expenses 

