10 of these ratios are needed for an understanding of the problem. If spe-
cial areas seem to warrant additional attention, it is not difficult to develop
other ratios.
The following ratios are the most generally used. The first two are
most relevant for current analysis. The remaining ones reveal more general
relationships.
Current Analysis Ratios
Current ratio (CR)
Acid test (AT)Leverage Ratio
Total debt/total assets (TDA)Sales Efficiency Ratio
Sales/total assets (SA)Profitability Ratios
Net profit/total assets (ROA)
Net profit/sales (ROS)
Net profit/equity (ROE)
EBIT/interest—times interest earned (TIE)Composite Firm Relative Valuation Ratios
DuPont analysis, return on invested capital (DuPontA)
Altman Z model (NewZ)Current Analysis Ratios
Current Ratio The current ratio is obtained by dividing the current liabili-
ties into the current assets. It indicates how many times current liabilities
are covered by current assets. The higher the current ratio, the more con-
servative (and safer) the current financial position of the firm. One prefers
a higher current ratio. Management can use its current assets to immedi-
ately reduce its current liabilities (i.e., pay them off). A 2-to-1 ratio is a
rule-of-thumb benchmark indicating a minimum level of the working capi-
tal position. Other circumstances must always be considered; no financial
analysis can proceed rigidly. A ratio below 2 does not necessarily make the
firm unsafe, nor does a current ratio well over 2 ensure financial sound-
ness. Much depends on the collectibility and time structures of the firm’s