Current Ratio - Current assets divided by current liabilities.
Your current ratio will be particularly important to you if you're thinking of borrowing
money. Banks use this ratio to measure a company's ability to pay off short-term debts.
A current ratio of 2:1 is considered the norm.
Changes in a company's current ratio over a period of years can point out problems and
successes. A declining current ratio could be pointing to financial problems. An
improving ratio could be the result of a brighter financial picture or an overstocked
warehouse (inventory is considered an asset). The key here is to find out why a ratio has
changed.
Debt To Assets Ratio - Total debt divided by total assets
Tells you what portion of your assets are paid for with borrowed money. A 78 percent
debt to assets ratio means that your creditors have supplied about 78 cents of every
dollar of your company's assets. Companies with a high debt to assets ratio may have
trouble borrowing any more money or may have to pay a higher interest rate on a loan
than it would if its ratio were lower.
state averages-47% (median 58%)
high profit-33% (median 37%)
low profit-61% (median 75%)
Debt to Equity Ratio
The higher the ratio, the greater the risk to a current or future creditor. A lower ratio
means your client's company is more financially stable and is probably in a better
position to borrow now and in the future.
Total Liabilities (or Debt)
Net Worth (or Total Equity)
Creditors look at this ratio when they are trying to decide what the chances are you won't
be able to make good on your business loans and obligations.
Look for a debt to equity ratio in the range of 1:1 to 4:1
Most lenders have credit guidelines and limits for the debt to equity ratio (2:1 is a
commonly used limit for small business loans).
Accounts Payable Turnover
The number of times Accounts Payables turnover during the year.
COGS
Average Accounts Payable
The higher the turnover, the shorter the time between purchase and payment. A low
turnover may indicate a shortage of cash to pay your bills or some other reason for a
delay in payment.
Net Profit Margin
Shows how much profit comes from every dollar of sales.
Net Profit
Total Sales
Compare to other businesses in the same industry to see if your business is operating
as profitably as it should be.
Look at the trend from month to month. Is it staying the same? Improving?
Deteriorating? Are you generating enough sales to leave an acceptable profit? Trend
from month to month can show how well you are managing your operating or overhead
costs.
Gross Profit Margin (Wells Fargo Bank)
Net sales minus costs of goods sold (COGS) as a percentage of sales.
Example for a grocery store: ($2 sale - $1.90 COGS) / $2 = 0.05 or 5%
Shows how much profit you make from a sale before meeting your overhead. Can apply
to all products, a product category or a specific item. Good ratios depend on type of
industry—for grocery stores, 5%; for most retail shops, 30%. In general, keep prices low
for highly competitive services and popular or seasonal products, i.e., turkeys during the
holidays. Raise prices for other services or products.
Inventory Turnover (Wells Fargo Bank)
COGS divided by average inventory value.
$1 million COGS / $200,000 av. inventory value = 5 times a year
Measures the number of times inventory—all products, a product category or a specific
item—gets used, replaced or sold annually. Low turnover suggests inventory may be
obsolete or tying up capital. Good ratios depend on type of industry—for grocery store,
20+ times a year; for hardware store, three times a year. Increase sales to have as little
inventory on hand as possible.