Another, more rigorous measure of solvency is the acid-test or quick ratio which excludes some current assets such as inventory because they might not be readily converted into cash. Efficiency Efficiency ratios are used to measure how well a company manages its assets and how effectively it uses those assets to generate sales. The inventory turnover ratio measures the relationship between the volume of goods sold and inventory levels. A turnover ratio of 2.9 means goods are bought and sold out more than 2.9 times a year on average. Profitability Profitability refers to the ability of the business to earn income.
Net income is the single most significant measure of profitability.
Investors and creditors have a great interest in evaluating the current and prospective profitability of a business, and profitability ratios have been developed to measure operational performance. Profit margin or return on sales indicates the dollar amount of net income the business receives from each dollar of sales. This ratio reflects management s ability to control costs relative to sales. It is clear that Newco must act to improve profitability or its future will be very uncertain. Return on assets indicates the company s performance in using the company s available resources to produce income.