Acid-Test (Quick Ratio)
Cash + Accts Receiv + Short-term Investments

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Current Liabilities

Current Liabilities

Current Ratio
Current Assets

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Current Liabilities

Current Liabilities

Average Collection Period
Accounts Receivable

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(Net Sales / 365)

(Net Sales / 365)

Debt Ratio
Total Liabilities

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Total Assets

Total Assets

Debt to Equity
Total Liabilities

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Stockholders Equity

Stockholders Equity

Gross Profit Margin
Gross Profit

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Net Sales

Net Sales

Return On Equity
Net Earnings

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Stockholders Equity

Stockholders Equity

Earnings per Common Share
Net Earnings

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Average Common Share Outstanding

Average Common Share Outstanding

Price to Earnings
Market Price of Common Stock

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Earnings per Share

Earnings per Share

Market Capitalization

Shares Outstanding * Stock Price

Shares Outstanding * Stock Price

Net Profit Margin
Net Income

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Net Sales

Net Sales

Return on Investment
Net Earnings

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Total Assets

Total Assets

Current Position Analysis uses Liquidity Ratios such as Working Capital, Current Ratio and Acid-test Ratio. Liquidity ratios measure the ability of a company to meets its currently maturing debts determined from the balance sheet. Liquidity ratios are especially of interest to short-term creditors.

A lending institution would look carefully at a business's
**Current Ratio** which compares a company's current assets to current liabilities.
The Current Ratio is also known as *working capital ratio* or *bankers' ratio*. The general rule is that a Current Ratio
should be at least 2:1. Current ratio is a more meaningful indication of a company's solvency to a lending corporation
than a company with a large Working Capital.

Working Captial = Current Assets - Current Liabilities

Current Ratio = Current Assets / Current Liabilities

The Acid Test Ratio also known as the Quick Ratio is a stronger measure of liquidity because it only uses cash and those items that can be quickly converted to cash from the Current Assets whereas the Current Ratio could include items that would be difficult to convert to cash.

Number of Days = Accounts Receivable / (Net Sales / 365)

In order for a company to determine how well they are doing they can compare their Average Collection Period to their company's credit policy. If the company's credit policy is that accounts are payable within 30 days and their Average Collection Period is 50 days then the company will have to review their credit policy or do a study to determine why payments are being made on time.

A company can compare its current Average Collection Period with previous years to determine if customers are taking longer to pay back on their accounts or if they are paying them back quicker. Of course the smaller the number of days the better because that means less time that the company's funds will be tied up in receivables and will now be available for other uses.

Since a company's Accounts Receiveable may vary widely throughout the year because of increases in seasonal sales it is usually best to determine the Average Collection Period over an annual period.

A company can improve its profitability by wisely taking on debt to make improvements to its business but it must be carefult not to take on too much debt. The Debt Ratio and Debt to Equity Ratio identify companies that are highly leveraged and therefore a higher risk for investors. Two groups have claims against a company; its creditors and its stockholders. Since creditors have first claim to a company's assets stockholder's are of course concerned how much debt is owed to them.

Compares a company's total debt to its total assets

If a company has total liabilies of $150,000 and a stockholder's equity of $100,000 this would mean that the company has a debt of $1.50 for every dollar of equity it has.

By looking at the Profitability Indicator Ratios one can see if the company is making money, if its profitability is on an uphill or downhill swing and how profitable it is compared to its competitors.

Rate of Return on Stockholders' Equity

The **Return on Equity** ratio tells common shareholders how well the company has done with the amount they have invested.

A company that has 9000 shares outstanding, with each share having a market value of $100, would have a market capitalization of $900,000 (1,000 x $100 per share).

The Investment world categorizes companies by their size using the term "market cap"

There are three categories of company sizes Large Cap, Mid Cap, and Small Cap. There is some descrepency in the cutoff value for what is a Large Cap, Mid Cap and Small Cap.

Large Cap companies are usually those who have a market capitalization that is greater than 10 billion. Mid Cap companies have 2 to 10 billion and Small Cap are below 2 billion.

The worksheet below shows the Ratio Analysis along with the Income Statement and Balance Sheet for Professor Office for 2014. The worksheet below that shows the same thing except it shows the Ratio formumlas rather than the result of those formulas.

The following image displays all the formulas used in the Ratio Analysis.