Any successful business owner is constantly evaluating the performance of his or her company. Ratios are vital tools to evaluate the financial condition of the company. By certain ratios, you can analyze profitability, liquidity and efficiency. Although ratio analysis is used to report on past performances, they can also provide certain indications of potential problem areas. Ratio analysis can also evaluate how your company compares to other businesses.
Add all your current assets and divide that amount by your current liabilities. This is called the current liquidity ratio. For example, $190,000 current assets divided by $122,000 current liabilities gives you a 1.56 liquidity ratio. The current liquidity ratio reveals your company’s ability to meet its current debts.
Consolidate all your accounts receivables and divide that amount by your current sales. Take that amount and multiply it by 365 days. The end result is called the efficiency ratio. For example, $52,000 accounts receivable divided by $543,000 current sales multiplied by 365 days gives you a 34.95 efficiency ratio. This ratio shows the average time it takes to turn the company’s accounts receivables into cash. This ratio tests the efficiency of your company.
Calculate your company’s net profit. The formula is income minus expenses. Divided the net profit by your company’s current sales and multiply the results by 100. This ratio is called Return on Sales or Profit Margin. For example, $12,000 net profit divided by $543,000 current sales multiplied by 100 gives you 2.21 percent profit margin. This ratio measures the percentage of profits earned for every dollar of sales.
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