show me how to calculate current ratios, long-term solvency ratios, contribution ratios
Sure, I can explain how to calculate these financial ratios.
1. Current Ratio:
The current ratio is a measure of a company's ability to pay its short-term obligations. It is calculated by dividing current assets by current liabilities. Here's the formula:
Current Ratio = Current Assets / Current Liabilities
To obtain the current assets and current liabilities, you can refer to a company's balance sheet. Current assets typically include cash, accounts receivable, inventory, and short-term investments. Current liabilities include accounts payable, short-term debt, and other short-term obligations.
For example, if a company has $100,000 in current assets and $50,000 in current liabilities, the current ratio would be:
Current Ratio = $100,000 / $50,000
Current Ratio = 2
A ratio above 1 is generally considered good, as it indicates the company has enough current assets to cover its current liabilities.
2. Long-term Solvency Ratio:
The long-term solvency ratio measures a company's ability to meet its long-term debt obligations. One commonly used long-term solvency ratio is the debt-to-equity ratio. It is calculated by dividing total debt by total equity. Here's the formula:
Debt-to-Equity Ratio = Total Debt / Total Equity
Total debt includes long-term debt, such as bank loans and bonds, while total equity includes shareholders' equity.
For example, if a company has $500,000 in total debt and $1,000,000 in total equity, the debt-to-equity ratio would be:
Debt-to-Equity Ratio = $500,000 / $1,000,000
Debt-to-Equity Ratio = 0.5
A lower ratio indicates a company has less reliance on debt and is generally considered more financially stable.
3. Contribution Ratio:
The contribution ratio is a measure of the profitability of a product or service. It calculates the percentage of each sale that contributes to covering fixed costs and generating profit.
Contribution Ratio = (Sales - Variable Costs) / Sales
Sales represent the total revenue generated from the product or service, while variable costs include costs directly related to producing or delivering the product.
For example, if a product has sales of $1,000 and variable costs of $400, the contribution ratio would be:
Contribution Ratio = ($1,000 - $400) / $1,000
Contribution Ratio = 0.6 or 60%
A higher contribution ratio indicates better profitability, as a larger percentage of each sale contributes to covering fixed costs and generating profit.
These are just a few examples of financial ratios that can be useful for analyzing a company's financial health and performance.