Current Ratio The ratio is mainly used to give an idea of the company's ability to pay back its shortterm

liabilities (debt and payables) with its short-term assets (cash, inventory,
receivables). The higher the current ratio, the more capable the company is of paying its
obligations. A ratio under 1 suggests that the company would be unable to pay off its
obligations if they came due at that point. While this shows the company is not in good
financial health, it does not necessarily mean that it will go bankrupt - as there are many
ways to access financing - but it is definitely not a good sign.
The current ratio can give a sense of the efficiency of a company's operating cycle or its
ability to turn its product into cash. Companies that have trouble getting paid on their
receivables or have long inventory turnover can run into liquidity problems because they
are unable to alleviate their obligations. Because business operations differ in each
industry, it is always more useful to compare companies within the same industry.

ACID test RATIO

stringent indicator that determines whether a firm has enough short-term assets to
cover its immediate liabilities without selling inventory. The acid-test ratio is far more
strenuous than the working capital ratio, primarily because the working capital ratio
allows for the inclusion of inventory assets.
Companies with ratios of less than 1 cannot pay their current liabilities and should be
looked at with extreme caution. Furthermore, if the acid-test ratio is much lower than the
working capital ratio, it means current assets are highly dependent on inventory. Retail
stores are examples of this type of business.

The term comes from the way gold miners would test whether their findings were real
gold nuggets. Unlike other metals, gold does not corrode in acid; if the nugget didn't
dissolve when submerged in acid, it was said to have passed the acid test. If a
company's financial statements pass the figurative acid test, this indicates its financial
integrity.

Receivable turnover An accounting measure used to quantify a firm's effectiveness in extending credit as
well as collecting debts. The receivables turnover ratio is an activity ratio, measuring
how efficiently a firm uses its assets.

By maintaining accounts receivable, firms are indirectly extending interest-free loans to

their clients. A high ratio implies either that a company operates on acash basis or that
its extension of credit and collection of accounts receivable is efficient.
A low ratio implies the company should re-assess its credit policies in order to ensure
the timely collection of imparted credit that is not earning interest for the firm.
Inventory Turnover
A ratio showing how many times a company's inventory is sold and replaced over a
period. The days in the period can then be divided by the inventory turnover formula to
calculate the days it takes to sell the inventory on hand or "inventory turnover days."

INVESTOPEDIA EXPLAINS 'INVENTORY TURNOVER'

Although the first calculation is more frequently used, COGS (cost of goods sold) may
be substituted because sales are recorded at market value, while inventories are
usually recorded at cost. Also, average inventory may be used instead of the ending
inventory level to minimize seasonal factors.
This ratio should be compared against industry averages. A low turnover implies poor
sales and, therefore, excess inventory. A high ratio implies either strong sales or
ineffective buying.
High inventory levels are unhealthy because they represent an investment with a rate of
return of zero. It also opens the company up to trouble should prices begin to fall.

SALES TREND
Composite data of a company's annual sales andemployment over three to five
year periods, compiled against its financial reports in an effort to gauge its
moving position, or trend, and relative health againstindustry peers.

DEFINITION OF 'DIVIDEND PER SHARE - DPS'

The the sum of declared dividends for every ordinary share issued. Dividend per
share (DPS) is the total dividends paid out over an entire year (including interim
dividends but not including special dividends) divided by the number of
outstanding ordinary shares issued.
DPS can be calculated by using the following formula:

D - Sum of dividends over a period (usually 1 year)

SD - Special, one time dividends
S - Shares outstanding for the period

Dividends per share are usually easily found on quote pages as the dividend paid
in the most recent quarter which is then used to calculate the dividend yield.
Dividends over the entire year (not including any special dividends) must be
added together for a proper calculation of DPS, including interim dividends.
Special dividends are dividends which are only expected to be issued once so
are not included. The total number of ordinary shares outstanding is sometimes
calculated using the weighted average over the reporting period.
For example: ABC company paid a total of $237,000 in dividends over the last
year of which there was a special one time dividend totalling $59,250. ABC has 2
million shares outstanding so its DPS would be ($237,000-$59,250)/2,000,000 =
0.0889 per share.

Dividend Yield
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DEFINITION OF 'DIVIDEND YIELD'

A financial ratio that shows how much a company pays out in dividends each
year relative to its share price. In the absence of any capital gains, the dividend
yield is the return on investment for a stock. Dividend yield is calculated as
follows:

INVESTOPEDIA EXPLAINS 'DIVIDEND YIELD'

Dividend yield is a way to measure how much cash flow you are getting for each
dollar invested in an equity position - in other words, how much "bang for your
buck" you are getting from dividends. Investors who require a minimum stream of
cash flow from their investment portfolio can secure this cash flow by investing
in stocks paying relatively high, stable dividend yields.
To better explain the concept, refer to this dividend yield example: If two
companies both pay annual dividends of $1 per share, but ABC company's stock
is trading at $20 while XYZ company's stock is trading at $40, then ABC has a

dividend yield of 5% while XYZ is only yielding 2.5%. Thus, assuming all other
factors are equivalent, an investor looking to supplement his or her income would
likely prefer ABC's stock over that of XYZ.

DEFINITION OF 'RETURN ON ASSETS - ROA'

An indicator of how profitable a company is relative to its total assets. ROA gives
an idea as to how efficient management is at using its assets to generate
earnings. Calculated by dividing a company's annual earnings by its total assets,
ROA is displayed as a percentage. Sometimes this is referred to as "return on
investment".
The formula for return on assets is:

ROA tells you what earnings were generated from invested capital (assets).
ROA for public companies can vary substantially and will be highly
dependent on the industry. This is why when using ROA as a comparative
measure, it is best to compare it against a company's previous ROA
numbers or the ROA of a similar company.

Return On Equity - ROE

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DEFINITION OF 'RETURN ON EQUITY - ROE'

The amount of net income returned as a percentage of shareholders equity.
Return on equity measures a corporation's profitability by revealing how much
profit a company generates with the money shareholders have invested.
ROE is expressed as a percentage and calculated as:
Return on Equity = Net Income/Shareholder's Equity

Net income is for the full fiscal year (before dividends paid to common stock
holders but after dividends to preferred stock.) Shareholder's equity does not
include preferred shares.
Also known as "return on net worth" (RONW).

INVESTOPEDIA EXPLAINS 'RETURN ON EQUITY - ROE'

The ROE is useful for comparing the profitability of a company to that of other
firms in the same industry.
There are several variations on the formula that investors may use:
1. Investors wishing to see the return on common equity may modify the formula
above by subtracting preferred dividends from net income and subtracting
preferred equity from shareholders' equity, giving the following: return on
common equity (ROCE) = net income - preferred dividends / common equity.