Which websites can i visit to find an analysis of financial ratios?

Question

I just want to have an understanding of exactly what the following ratios mean and how to interpret them:

current ratio
working capital
asset turnover
return on sales

Answer 1

Investopedia is a decent web site.
www.investopedia.com

Current ratio (current assets/current liabilities) is a ratio that basically shows whether a company has enough liquid capital to pay what they owe in the next 12 months. A current ratio of less than 1.0 is generally seen as a red flag indicating that the company will need to raise more capital to pay for their liabilities in the short term. It is a shortcut ratio rather than the definite cause-effect ratio.

Working capital is not a ratio, but a balance. Working capital definitions vary, but it is generally cash, inventory, accounts receivable less accounts payable and accrued payables. Basically, this is the capital needed to keep the business running. If you are a service (e.g. consulting), you generally need very little working capital, but inventory-based businesses need capital to stock the shelves and finance that gap between paying your suppliers and getting paid from your distributors.

Asset turnover is Revenues/Avg. Assets. This is a "capital velocity" ratio that shows how much money you bring in on the revenue side compared to how much capital you have put to work. It is a somewhat meaningless ratio by itself, but becomes much more relevant when combined with "return on sales".

"Return on sales" is not a common term. It is usually called "net profit margin". This is net profit/revenues and shows how much money equity shareholders earn on every dollar brought in on revenues after paying off all expenses. When combined with Asset Turnover ratio, it gives you return on assets [(Return on sales) x (Asset Turnover) = Return on Assets]. This shows you how much money you are making on the capital invested. For example, if you are getting 5% Return on Assets, you might be disappointed as bond holders might expect 5-8% returns while equity holders usually want 11-20%, depending on the risk of the business. In other words, if a business does not return the cost of capital, it is probably a bad business.