Financial Ratio Analysis

Financial ratios provide a means of measuring the overall health of a business. While numerous measures exist, the most popular measure the overall health of your business analyzing income, liquidity, assets, debt and profitability.

Income Analysis

  • Gross Profit: Measures total sales less cost of goods sold.
  • Operating Income: Income after operating expenses are paid.
  • Income Before Taxes: Income after non-sales revenue and interest paid are taken into consideration.
  • Net Profit: Total profit generated by the business on a post-tax basis.

Liquidity

  • Current: Measures the ability of a business to pay its current liabilities using available assets.
  • Quick (Acid Test): Measures the ability of a business to pay its current liabilities using available assets, less inventory.

Asset Management

  • Inventory Turnover: An estimate of how many times during the year your inventory is turned over, based on sales.
  • Fixed Asset Turnover: An estimate of how many times during the year your fixed assets are turned over, based on sales.
  • Total Asset Turnover: An estimate of how many times during the year your total assets are turned over, based on sales.
  • Average Collection Period: The average amount of time it takes to receive cash from a sale.

Debt Management

  • Debt-to-Assets: Measures the amount of total funds that have been provided by creditors or lenders.
  • Times Interest Earned: Measures interest paid against pre-tax earnings as an indicator of a businesses ability to make interest payments to its creditors.

Profitability

  • Profit Margin: Measures the percentage of each sales dollar that is generated as profit.
  • Return on Assets: Measures the rate at which profit is returned against total assets.
  • Return on Equity: Measures the rate at which profit is returned against total shareholder equity.

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