# RATIOS

```RATIOS
Liquidity
• Current Ratio = Total Current Assets
Total Current Liabilities
***1.5 to 2 is desirable****
 Measures ability to pay current liabilities with current assets
Liquidity Ratios
Debt/Equity Percentages
Debt Ratio = Total liabilities x 100
Total Assets
Shows proportion of assets that are financed with debt
Low debt ratio is desirable
Equity Ratio = Total Equity x 100
Total Assets
Shows proportion of assets financed with shareholder’s funds
**Two percentages are complementary, which means that they add up to 100**
Profitability
Rate of Return on Net Sales = Net Income x 100
Net Sales
Measures the dollars that remain after all expenses are deducted from
net sales
Compare with other years. (look for trends)
For example, 9.1% means 9₡ is left after all expenses are paid per dollar
of sales.
Profitability
Gross Margin Percentage = Gross Margin
Net Sales Revenue
 Measures the dollars that remain after cost of goods sold is deducted
WitFit Letter Outline
Intro – tell reason for writing
Paragraph 1 – Liquidity  Tell him the numbers and what they mean.
Recommend what he should do.
Paragraph 2 – Profitability  Tell him the numbers and what they mean.
Recommend what he should do.
Paragraph 3 – Any other points. Final summary.
**Remember to include graphs and charts as instructed in letter sample**
```