Calculate Common Ratios

Divide current assets by current liabilities. This ratio represents the company’s current ratio and reflects its ability to pay its debts for the coming year. This ratio needs to be over 1.00.

Divide annual sales by the amount of inventory listed on the balance sheet. This represents the number of inventory turns, and gives an indication as to how lean and efficient the company runs. Typically, the higher the number the better, as long as it is not taken to extremes.

Divide EBITDA by annual sales. This represents the company’s margins. You want them to be as large as possible.

References

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