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    Entrepreneurs

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    Ellaine Pearl Almilla
    Financial ratios measure the relationship between different components of a company's financial statements and allow entrepreneurs to evaluate their business's performance over time compared to others in their industry. Some key ratios entrepreneurs should examine include leverage ratios like debt-to-equity and debt-to-assets to assess dependence on debt, liquidity ratios like working capital and cash ratios to evaluate ability to meet short-term obligations, and profitability ratios like net profit margin and return on equity to measure profit generation. Operations ratios can also provide insights into areas like accounts receivable, inventory turnover, and payment periods.

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    Entrepreneurs

    Uploaded by

    Ellaine Pearl Almilla
    61 views2 pages
    Financial ratios measure the relationship between different components of a company's financial statements and allow entrepreneurs to evaluate their business's performance over time compared to others in their industry. Some key ratios entrepreneurs should examine include leverage ratios like debt-to-equity and debt-to-assets to assess dependence on debt, liquidity ratios like working capital and cash ratios to evaluate ability to meet short-term obligations, and profitability ratios like net profit margin and return on equity to measure profit generation. Operations ratios can also provide insights into areas like accounts receivable, inventory turnover, and payment periods.

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    Financial ratios measure the relationship between different components of a company's financial statements and allow entrepreneurs to evaluate their business's performance over time compared to others in their industry. Some key ratios entrepreneurs should examine include leverage ratios like debt-to-equity and debt-to-assets to assess dependence on debt, liquidity ratios like working capital and cash ratios to evaluate ability to meet short-term obligations, and profitability ratios like net profit margin and return on equity to measure profit generation. Operations ratios can also provide insights into areas like accounts receivable, inventory turnover, and payment periods.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    61 views2 pages

    Entrepreneurs

    Uploaded by

    Ellaine Pearl Almilla
    Financial ratios measure the relationship between different components of a company's financial statements and allow entrepreneurs to evaluate their business's performance over time compared to others in their industry. Some key ratios entrepreneurs should examine include leverage ratios like debt-to-equity and debt-to-assets to assess dependence on debt, liquidity ratios like working capital and cash ratios to evaluate ability to meet short-term obligations, and profitability ratios like net profit margin and return on equity to measure profit generation. Operations ratios can also provide insights into areas like accounts receivable, inventory turnover, and payment periods.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    of 2

    Financial ratios offer entrepreneurs a way to evaluate their company’s performance and compare it

    other similar businesses in their industry.

    Ratios measure the relationship between two or more components of financial statements. They are
    used most effectively when results over several periods are compared. This allows you to follow your
    company’s performance over time and uncover signs of trouble.

    Here are some key financial ratios to measure the financial health of your business.

    Leverage ratios

    1. Debt-to-equity ratio = Total liabilities / Shareholders' equity

    Measures how much debt a business is carrying as compared to the amount invested by its owners. This
    indicator is closely watched by bankers as a measure of a business’s capacity to repay its debts.

    2. Debt-to-asset ratio = Total liabilities / Total assets

    Shows the percentage of a company’s assets financed by creditors. A high ratio indicates a substantial
    dependence on debt and could be a sign of financial weakness.

    Liquidity ratios

    1. Working capital ratio = Current assets / Current liabilities

    Indicates whether a business has sufficient cash flow to meet short-term obligations, take advantage of
    opportunities and attract favourable credit terms. A ratio of 1 or greater is considered acceptable for
    most businesses.

    2. Cash ratio = Liquid assets / Current liabilities

    Indicates a company's ability to pay immediate creditor demands, using its most liquid assets. It gives a
    snapshot of a business's ability to repay current obligations as it excludes inventory and prepaid items
    for which cash cannot be obtained immediately.

    Profitability ratios

    1. Net profit margin = After tax net profit / Net sales

    Shows the net income generated by each dollar of sales. It measures the percentage of sales revenue
    retained by the company after operating expenses, interest and taxes have been paid.

    2. Return on shareholders’ equity = Net income / Shareholders' equity

    Indicates the amount of after-tax profit generated for each dollar of equity. A measure of the rate of
    return the shareholders received on their investment.

    3. Coverage ratio = Profit before interest and taxes / Annual interest and bank charges

    Measures a business's capacity to generate adequate income to repay interest on its debt.

    4. Return on total assets = Income from operations / Average total assets

    Measures the efficiency of assets in generating profit.


    Operations ratios

    1. Accounts receivable turnover = Net sales / Average accounts receivable

    A higher turnover rate generally indicates less money is tied up in accounts receivable because
    customers are paying quickly.

    2. Average collection period = Days in the period X Average accounts receivable / Total amount of net
    credit sales in period

    Indicates the amount of time customers are taking to pay their bills.

    3. Average days payable = Days in the period X Average accounts payable / Total amount of purchases
    on credit

    Measures the average number of days it you are taking to pay suppliers.

    4. Inventory turnover = Cost of goods sold / Average inventory

    Measures the efficiency of assets in generating profit.

    Try BDC’s free financial ratio calculators to assess the performance of your business.

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