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Financial Ratio Analysis

How Healthy is My Business Financially?

Financial ratios provide a means of measuring the overall health of a business. While numerous tests exist, the most popular measure the overall health of your business analyzing income, liquidity, assets, debt and profitability.

Income Analysis

Gross Profit: Measures total sales less cost of goods sold.
Operating Income: Income after operating expenses are paid.
Income Before Taxes: Income after non-sales revenue and interest paid are taken into consideration.
Net Profit: Total profit generated by the business on a post-tax basis.
Liquidity

Current: Measures the ability of a business to pay its current liabilities using available assets.
Quick (Acid Test): Measures the ability of a business to pay its current liabilities using available assets, less inventory.
Asset Management

Inventory Turnover: An estimate of how many times during the year your inventory is turned over, based on sales.
Fixed Asset Turnover: An estimate of how many times during the year your fixed assets are turned over, based on sales.
Total Asset Turnover: An estimate of how many times during the year your total assets are turned over, based on sales.
Average Collection Period: The average amount of time it takes to receive cash from a sale.
Debt Management

Debt-to-Assets: Measures the amount of total funds that have been provided by creditors or lenders.
Times Interest Earned: Measures interest paid against pre-tax earnings as an indicator of a businesses ability to make interest payments to its creditors.
Profitability

Profit Margin: Measures the percentage of each sales dollar that is generated as profit.
Return on Assets: Measures the rate at which profit is returned against total assets.
Return on Equity: Measures the rate at which profit is returned against total shareholder equity.

Financial Ratio Analysis