Working capital

    Net Working Capital = Current Assets − Current Liabilities
    Net Operating Working Capital = Current Assets − Non Interest-bearing Current Liabilities
    Equity Working Capital = Current Assets − Current Liabilities − Long-term Debt

Inventory turnover & Inventory turnover in days ratio calculation

During the year, ABCD Company had a cost of goods sold of $1,344. inventory at the end of year was $ 422. in this case, Inventory Turnover can be calculated as follows:

Inventory Turn Over = Cost of Goods Sold/ Inventory
                                   = 1344/422
                                   = 3.2 Times


ABCD sold off or turned over entire inventory 3.2 times. The higher the ratio is, the more efficiently we are managing inventory. Now Inventory turnover in days ratio calculation


Inventory Turn Over in days = 365* days/ Inventory Turn over
                                                = 365 days/3.2
                                                = 114 days


* the days can be assume 360 days also.

Turnover ratio

Turnover ratio:

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• Cash to sales = Cash/sales
• Accounts receivable to sales = Accounts receivable/sales
• Inventory to sales = Inventory/sales
• Quick assets to sales = Quick assets/sales
• Current assets to sales = Current assets/sales
• Working capital to sales =Working capital/sales
• Net worth to sales = Net worth/sales
• Total assets to sales = Total assets/sales

Turnover measure or asset management is known as assets utilization ratio. it described how efficiently or intensively a firm use its assets to generates sales.

Liquid assets to current debt ratio

Liquid assets to current debt ratio:

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• Cash to current liabilities = Cash/current liabilities
• Quick assets to current liabilities = Quick assets/current liabilities
• Current ratio = Current Assets/Current Liabilities


Liquid assets to current debt test ratio help find the portion of liquid assets in per Unit current debt .

How to calculate Liquid assets to total assets ratio

Liquid assets to total assets ratio:

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• Cash to total assets = Cash/total assets
• Quick assets to total assets = Quick assets/total assets
• Current assets to total assets = Current assets to total assets
• Working capital to total assets = Working capital/total assets

these ratio test helps company to calculate how much liquid assets is available in total assets

Leverage Ratio or Equity Multiplier

Leverage Ratio, another name is Equity Multiplier is calculated by Total Assets per unit or Dollar of stockholders' Equity.

It is calculated by Total Assets divided Equity or 1+debt equity ratio

Equity Multiplier :1) Total Assets/ Equity

                                2) 1+ debt equity ratio 

Debt-equity ratio: Total Debt/Total Equity

the equity multiplier is a way of examining how a company uses debt to finance its assets. A higher equity multiplier indicates higher financial leverage, which means the company is relying more on debt to finance its assets.

Interest coverage ratio = EBIT/Interest Expense

A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period:



Interest coverage ratio = EBIT/Interest Expense


The lower the ratio, the more the company is burdened by debt expense. And the result is depends on industry average.

Leverage Ratio / Debt to total Assets Ratios

Leverage Ratio / Debt to total Assets Ratio:

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• Current liabilities to total assets = Current liabilities/total assets
• Long-term liabilities to total assets= Long-term liabilities/total assets
• Current plus long-term liabilities to total assets= Current plus long-term liabilities/total assets
• Current plus long-term plus preferred stock to total assets = Current plus long-term plus preferred stock/ total assets
• Interest coverage ratio = EBIT/Interest Expense 
• Capitalization ratio (long term debt / LTD + stockholders equity)

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The capitalization ratio measures the debt component of a company's capital structure, or capitalization (i.e., the sum of long-term debt liabilities and shareholders' equity) to support a company's operations and growth.

Long-term debt is divided by the sum of long-term debt and shareholders' equity. This ratio is considered to be one of the more meaningful of the "debt" ratios - it delivers the key insight into a company's use of leverage.

There is no right amount of debt. Leverage varies according to industries, a company's line of business and its stage of development. Nevertheless, common sense tells us that low debt and high equity levels in the capitalization ratio indicate investment quality.

Ratios of Profitability Measures Calculation or Formula

Profitability Measures:

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• Gross Income to sales = Gross Income/sales
• Gross income to net worth = Gross income/net worth
• Gross Income to total assets = Gross Income/total assets
• Gross income to total debt = Gross income/total debt
• Net income to sales = Net income/sales
• Net income to net worth (ROI)= Net income/net worth
• Net income to total assets (ROA) = Net income/total assets
• Net income to total debt = Net income/total deb
• Effective Tax Rate = (Income tax / Pre tax income)

Formula or Calculation of Cash Flow Coverage Ratio

Cash Flow Coverage Ratio (Operating cash flow / Short term debt)

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This ratio measures the ability of the company's operating cash flow to meet its obligations - including its liabilities or ongoing concern costs.

The operating cash flow is simply the amount of cash generated by the company from its main operations, which are used to keep the business funded.

The larger the operating cash flow coverage for these items, the greater the company's ability to meet its obligations, along with giving the company more cash flow to expand its business, withstand hard times, and not be burdened by debt servicing and the restrictions typically included in credit agreements.

Free Cash Flow/Operating Cash Ratio

Free Cash Flow/Operating Cash Ratio (Free cash flow /Operating cash flow)

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The free cash flow/operating cash flow ratio measures the relationship between free cash flow and operating cash flow.

Free cash flow is most often defined as operating cash flow minus capital expenditures, which, in analytical terms, are considered to be an essential outflow of funds to maintain a company's competitiveness and efficiency.

The cash flow remaining after this deduction is considered "free" cash flow, which becomes available to a company to use for expansion, acquisitions, and/or financial stability to weather difficult market conditions. The higher the percentage of free cash flow embedded in a company's operating cash flow, the greater the financial strength of the company.

Cash flow Ratios

Cash flow Ratio:

·         Cash inflow to sales= Cash Inflow/ sales

·         Cash outflow to sales = Cash outflow /sales

·         Operating cash flow to sales = Operating cash flow/sales

·         Financing cash flow to sales = Operating cash flow/sales

·         Investing cash flow to sales = Investing cash flow/sales

·         Cash flow to net wroth = Cash flow/net wroth

·         Cash flow to total assets = Cash flow/total assets

       Cash flow to total debt = Cash flow/total debt

·         This coverage ratio compares a company's operating cash flow to its total debt, which, for purposes of this ratio, is defined as the sum of short-term borrowings, the current portion of long-term debt and long-term debt. This ratio provides an indication of a company's ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company's ability to carry its total debt.

Five Factors of ROE (Return On Equity) decomposition

This Five Factors of ROE decomposition is given bellow:

Normally ROE= NI/Equity but in five factors decomposition addition 4 items in total 6 items needed. those are:

NI=Net Income

EBT= Earning Before Tax

EBIT=Earning Before Interest & Tax

Sales= Total sales Amount

TA=Total Assets, &

Equity= or Total Equity.

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