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# The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce

revenue. The numerator of the asset turnover ratio formula shows revenues which are found on a company's income statement and the denominator shows total assets which is found on a company's balance sheet. Total assets should be averaged over the period of time that is being evaluated. For example, if a company is using 2009 revenues in the formula to calculate the asset turnover ratio, then the total assets at the beginning and end of 2009 should be averaged. It should be noted that the asset turnover ratio formula does not look at how well a company is earning profits relative to assets. The asset turnover ratio formula only looks at revenues and not profits. This is the distinct difference between return on assets (ROA) and the asset turnover ratio, as return on assets looks at net income, or profit, relative to assets.

The net profit margin formula looks at how much of a company's revenues are kept as net income. The net profit margin is generally expressed as a percentage. Both net income and revenues can be found on a company's income statement. Use of Net Profit Margin Formula One mistake a company or investor may make is to equate company growth, or an increase in sales, with a proportionate increase in profits. This does not take into account the costs associated with the growth of a company. As a company grows, its expenses will at times grow along with it, perhaps at a greater rate than sales. As the expense of a company rises, the net profit margin may shrink. Even attempts to compensate the added expenses with an increase in the sales price of the product, may result in a decrease in the quantity of sales as consumers may not be as willing to purchase the product at the higher price. If this were to happen, total revenues could decrease despite the increase of price per product. In some situations, the opposite may happen as the cost of production could decrease as production increases. Although these issues are primarily related to other financial and economic concepts, it is important for a company to apply this formula to monitor its net profit margin as the company changes.

Example of Net Profit Margin Formula A company's income statement shows a net income of \$1 million and operating revenues of \$25 million. By applying the formula, \$1 million divided by \$25 million would result in a net profit margin of 4%. Although the formula is simplistic, applying the concept is important in that 4% of sales will result in after tax profit.

The formula for the debt to equity ratio is total liabilities divided by total equity. The debt to equity ratio is a financial leverage ratio. Financial leverage ratios are used to measure a company's ability to handle its long term and short term obligations. Both debt and equity will be found on a company's balance sheet. Debt may show as total liabilities and equity may show as total stockholder's equity. Underlying Concept of Debt to Equity Ratio Understanding the debt to equity ratio first requires understanding the capital structure of a company. A company's value, or at least as it is denoted based on assets, is a company's liabilities plus stockholder's equity, or owner's equity.

Considering that a company's assets or value is comprised of liabilities plus equity, the debt to equity ratio contrasts these two variables to show a company's leverage position. As a company increases their leverage or debt, they are considered a higher risk

The formula for the debt ratio is total liabilities divided by total assets. The debt ratio shown above is used in corporate finance and should not be confused with the debt to income ratio, sometimes shortened to debt ratio, used in consumer lending. The debt ratio is a financial leverage ratio used along with other financial leverage ratios to measure a company's ability to handle its obligations. If a company is overleveraged, i.e. has too much debt, they may find it difficult to maintain their solvency and/or acquire new debt. Just as in consumer loans, companies are evaluated when taking on new obligations to determine their risk of non-repayment. Both the total liabilities and total assets can be found on a company's balance sheet.

Current Ratio =

The Current Ratio provides a calculable means to determining a company's liquidity in the short term. The terms of the equation Current Assets and Current Liabilities references the assets that can be realized or the liabilities that are payable in less than a year. Although the Current Ratio formula is fairly simplistic, a company's short term liquidity is important to maintaining a financially sound company. A company that cannot maintain their short term debt will quickly become inoperable even if they expect to receive payment on their sales in the future.

The formula for the inventory turnover ratio measures how well a company is turning their inventory into sales. The costs associated with retaining excess inventory and not producing sales can be burdensome. If the inventory turnover ratio is too low, a company may look at their inventory to appropriate cost cutting. The denominator of the formula, inventory, is an average inventory for the period being analyzed. If monthly sales are used in the numerator of the formula, then the monthly average of inventory should be used. An alternative formula used for the inventory turnover ratio is:

As stated in the previous section, the cost of goods method looks at a company's ability to meet the direct costs associated with selling their product. This should be not confused with the overall costs associated with running the business. The benefit to using this method is to eliminate gross profit from consideration.

The return on assets formula, sometimes abbreviated as ROA, is a company's net income divided by its average of total assets. The return on assets formula looks at the ability of a company to utilize its assets to gain a net profit. Net income in the numerator of the return on assets formula can be found on a company's income statement. Net income is the amount earned by a company after subtracting out the expenses incurred, including depreciation and taxes. Average total assets in the denominator of the return on assets formula is found on a company's balance sheet. The average of total assets should be used based on the period being evaluated. For example, if an investor is calculating a company's 2015 return on assets, the beginning and ending total assets for that year should be averaged.

The formula for return on equity, sometimes abbreviated as ROE, is a company's net income divided by its average stockholder's equity. The numerator of the return on equity formula, net income, can be found on a company's income statement. Average Stockholder's Equity in the ROE Formula The denominator of the return on equity formula, average stockholder's equity, can be found on a company's balance sheet. Stockholder's equity is a company's assets minus its liabilities. When calculating the return on equity, the stockholder's equity should be averaged based on the time being evaluated. For example, if an investor is calculating the return on equity for 2012, then the beginning and ending stockholder's equity should be used. Stockholder's equity is also referred to as net assets.

Use of ROE Formula The return on equity can be used internally by a company or can be used by an investor to evaluate how well the company is turning a profit relative to its stockholder's equity.