# Accounting

## Altman Z-Score

Altman z-score is a statistic that measures the credit risk of a company. Companies with z-score of less than 1.81 are prone to bankruptcy. Z-score equals 1.2 times the working capital to total assets, 1.4 times retained earnings to total assets, 3.3 times EBIT to total assets, 0.6 times market capitalization to book value of liabilities and 1 time the total asset turnover.

## Activity Ratios

Activity ratios (also called efficiency ratios and asset-utilization ratios) are financial ratios which measure how successfully a company is utilizing it assets. Important efficiency ratios include total asset turnover ratio, working capital turnover ratio, inventory turnover ratio, receivables turnover ratio, days inventories outstanding, days sales outstanding, operating cycle, etc.

## Profitability Ratios

Profitability ratios are financial ratios which measure a company’s ability to earn income. Important profitability ratios include gross profit margin, net profit margin, operating profit margin, return on assets, return on equity, return on capital employed and earnings per share, etc. Majority of the profitability ratios are income statement ratios.

## Gearing Ratio

Gearing ratio is a measure of a company’s financial leverage i.e. the level of interest-bearing liabilities in its capital structure. Gearing ratio is most commonly calculated by dividing total debt by shareholders equity. Alternatively, it is also calculated by dividing total debt by total capital.

## Leverage Ratios

Leverage ratios are financial ratios which measure a company’s ability to pay off its obligations. The most common leverage ratios are debt ratio, debt to equity ratio and equity multiplier. The equity multiplier is also called financial leverage ratio.

## Solvency Ratios

Solvency ratios are financial ratios which measures a company’s ability to pay off its long-term debt and associate interest obligations. Important solvency ratios include debt ratio (i.e. deb to assets ratio), debt to equity ratio, financial leverage ratio (also called equity multiplier) and interest coverage ratio.

## Liquidity Ratios

Liquidity ratios are financial ratios which measure a company’s ability to pay off its short-term financial obligations i.e. current liabilities using its current assets. The list includes current ratio, quick ratio, cash ratio and cash conversion cycle. A high current ratio, quick ratio and cash ratio and a low cash conversion cycle shows good liquidity position.

## Expanded DuPont ROE Analysis

DuPont decomposition of return on equity (ROE) identifies the drivers of a company’s ROE in terms of EBIT margin, interest burden, tax burden, total asset turnover ratio and financial leverage ratio. In order to achieve high ROE, a company must increase its EBIT margin, decrease its interest expense and taxes, increase its asset utilization and include more debt in its capital structure.

## Net Operating Cycle

Net operating cycle measures the number of days a company’s cash is tied up in inventories and receivables on average. It equals days inventories outstanding plus days sales outstanding minus days payable outstanding. It is also called cash conversion cycle.

## Cash to Income Ratio

Cash to income ratio is a cash flow ratio which measures dollars of cash flows from operating activities per dollar of operating income. It is calculated by dividing cash flows from operations by the operating income. Operating income roughly equals earnings before interest and taxes.