The Road to Successful Trading

 
The current ratio is used to test the short-term liability-paying ability of a business. It’s calculated 
by dividing total current assets by total current liabilities in a company’s most recent balance sheet. 
From the data in the example below: 
The total current assets of $ 43,824 
(millions) divided by the total 
current liabilities of $ 48,826 
equals a Current Ratio of: is .9
2
. 
This means that the company has 
90 cents of current assets (can be 
turned into cash within 12 months) 
to cover $1 of debt due within 12 
months. As a general rule, a 
company with a Current Ratio of 
2.0 or more is considered in good 
financial position to meet its short term obligations.
A more severe measure of the short-term liability-paying ability of a business is the acid test 
(“Quick”) ratio, which excludes inventory (and prepaid expenses also). Only cash, market-able 
securities investments (if any), and accounts receivable are counted as sources to pay the current 
liabilities of the business. It is also called the quick ratio because only cash and assets quickly 
convertible into cash are included in the amount available for paying current liabilities. The rule of 
thumb is that a company’s acid test ratio should be 1 to 1 or better, although you find many more 
exceptions to this as compared with the 2 to 1 current ratio standard.
 
 
How to Design and Construct An Effective Trading Plan 
28
2
Wal-Mart is a little different in that much of its inventory is not owned. Wal-Mart leases-out its shelf space to vendors. Normally, a company owns 
its inventory which would raise the ratio considerably.

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The Operating Statement 
The 
income statement
 is the most popular Financials statement in an annual or quarterly Company 
report required to be filed by the SEC. The income statement is the “sexy” portion of the financial 
statements because it includes figures such as 
revenue
, 
net income
 and 
earnings per share
 (EPS). In
essence, an income statement tells you how 
much revenue a company produced and the 
profits made after all expenses, which are 
clearly described in the income statement (also 
called the operating Statement).The income 
statement is simply designed, and is even 
simpler to read. The statement is looked at 
from top to bottom. The 
top line
lists the 
revenue (sales) brought in. Each subsequent 
line deducts expenses and costs from the 
revenue figure until you finally get to the 
bottom line (net income). Each item that has a 
line above the number means that it is a 
subtotal or total (the net income usually has a 
bold or double line below the number). Below 
is the typical layout of an income statement. 
There isn’t one cookie-cutter way to present a company’s income statement. The exact information 
presented depends, to some extent, on the type of business the company operates.
The Operating Statement (aka Income Statement) 
Earnings per share (EPS) 
One of the most-used ratios in stock value and securities analysis is earnings per share (EPS). The 
essential calculation of earnings per share is as follows:
Net Income Available for Common Stockholders / Total Number of Outstanding Common 
Stock Shares = basic earnings per hare