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.