You can’t manage what you don’t measure.
Robert S. Kaplan
Using ratios can provide valuable insights into your company’s performance and financial health. Here is a comprehensive list of business ratios that you can use to analyze your company’s performance:
- Liquidity Ratios
Liquidity ratios measure a company’s ability to pay off its short-term debts. These ratios provide insight into a company’s short-term financial health.
- Current Ratio: This ratio measures a company’s ability to pay off its short-term debts using its current assets. The formula is Current Assets / Current Liabilities.
- Quick Ratio: This ratio measures a company’s ability to pay off its short-term debts using its most liquid assets. The formula is (Current Assets – Inventory) / Current Liabilities.
- Efficiency Ratios
Efficiency ratios measure how efficiently a company uses its assets and resources. These ratios provide insight into a company’s operational efficiency.
- Inventory Turnover Ratio: This ratio measures how quickly a company sells its inventory. The formula is Cost of Goods Sold / Average Inventory.
- Accounts Receivable Turnover Ratio: This ratio measures how quickly a company collects payments from its customers. The formula is Net Credit Sales / Average Accounts Receivable.
- Profitability Ratios
Profitability ratios measure a company’s ability to generate profits. These ratios provide insight into a company’s financial health.
- Gross Profit Margin Ratio: This ratio measures the percentage of revenue that remains after deducting the cost of goods sold. The formula is (Revenue – Cost of Goods Sold) / Revenue.
- Net Profit Margin Ratio: This ratio measures the percentage of revenue that remains after deducting all expenses, including taxes. The formula is Net Profit / Revenue.
- Debt Ratios
Debt ratios measure a company’s debt levels and financial risk. These ratios provide insight into a company’s financial health and ability to pay off its debts.
- Debt-to-Equity Ratio: This ratio measures the amount of debt that a company has compared to its equity. The formula is Total Debt / Total Equity.
- Debt Ratio: This ratio measures the percentage of a company’s assets that are financed by debt. The formula is Total Debt / Total Assets.
- Return Ratios
Return ratios measure a company’s ability to generate returns on its investments. These ratios provide insight into a company’s profitability and financial health.
- Return on Assets (ROA) Ratio: This ratio measures the return that a company generates on its assets. The formula is Net Income / Total Assets.
- Return on Equity (ROE) Ratio: This ratio measures the return that a company generates on its equity. The formula is Net Income / Total Equity.
These are just some of the key business ratios that you can use to analyze your company’s performance and financial health. By regularly monitoring these ratios, you can gain valuable insights into your company’s strengths and weaknesses and make informed decisions about your business strategies.
