Assets = Liabilities + Shareholders' Equity

• Assets must generate revenue; otherwise, businesses would not hold them

Profitability Ratios

Liquidity ratios

• Current Ratio: Ability to pay off short-term obligations. >1 preferred.
• Quick Ratio: Conservative version of current ratio, since inventory is not easily liquidated

Activity ratios

• Efficiency with which assets are converted to sales (higher = better)
• Inventory Turnover: High = efficient, low = not (unless luxury good)
• Avg. Coll. Period: May use total instead of credit sales. Also equals $365/AccountsReceivableTurnover$

Financing ratios

• Debt Ratio/Debt Equity Ratio: Higher = riskier, so investors expect more interest
• TIE Ratio: Ability of a firm to pay back debts and interest.

Market ratios

• EPS: Predict company's dividends per share