Accountants and economists have developed many business ratios over the years to assist them in evaluating the financial health of business. Ratio analysis may help you put things in proper business perspectivehomesite mapcontact us
 

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RATIO ANALYSIS

Accountants and economists have developed many business ratios over the years to assist them in evaluating the financial health of business. Ratio analysis may help you put things in proper business perspective. Ratios are commonly used to measure a performance from one year to the next year and will help you to compare various aspects of business (profitability, how well business is managed, sales to inventory etc). 
When your ratios differ from those of similar businesses or change unexpectedly from one period to the next, they can be used as early-warning signals.
Find Ratios:

CURRENT RATIO
Current  ( or working capital ) ratio is based on your working capital. It measures how well the business is able to pay its current debts using only current assets. This ratio is calculated by dividing current assets by current liabilities. By rule it should be 2:1, that means you have $2 in current assets for every dollar of current liabilities. The higher it is, the better the indication, but management and quality of assets must be considered. However, as with any other ratio, it's important to compare it to those of previous years and to those of similar businesses ( could be a sign of trouble if it's declining).
Total Current Assets
  Total Current Liabilities
QUICK  RATIO
Quick Ratio or Acid Test Ratio, measures how quickly your company can raise cash by selling off its most liquid assets to meet its liabilities. To calculate, subtract inventories from current assets (cash, accounts receivable or any other quick assets ) and divide by current liabilities.
Cash+Accounts Receivable
(+Any Other Quick Assets)
Current Liabilities
OPERATING EXPENSE RATIO
This ratio measures each operating expense by net sales. From the resulting picture, management can evaluate internal economic efficiency.
ANY OPERATING EXPENSE X 100
NET SALES
SALES TO INVENTORY RATIO
Sales to Inventory ratio measures relationship between inventory and sales to help determine inventory turnover. It is important in determing the investment to be made in invevtory or if business want increase sales while inventory is reduced.
NET SALES
INVENTORY
NET PROFITS TO SALES RATIO
Net profit to Sales ratio is a very good profit margin measurement to help determine management's ability to control operating expenses, pay taxes and result in good profit margin on sales.
NET PROFITS
SALES
SALES TO NET WORTH RATIO
Sales to Net Worth Ratio measures volume of sales in relation to the business's investment. The best is if you keep a balance, because high sales to worth puts pressure on the investment and loss of sales underutilizing capital.
SALES
NET WORTH
PROFIT TO NET WORTH RATIO
Profit to Net Worth Ratio (or Net Income to Total Equity Ratio) This ratio is almost always given as a percentage and it is a measurement of the owner's rate of return on investment.
PROFIT
NET WORTH
LIABILITIES TO NET WORTH RATIO
Liabilities to Net Worth Ratio ( or Total Debth to Total Equity Ratio ) This ratio measures the amount invested in the business by creditors with that invested by the owner or owners. If ratio is high that indicate the business is extending its debt beyond its ability to repay. The lower the ratio, the greater the cushion against losses to creditors, but to low ratio may indicate that the owner is too conservative and is not letting the business realize its potential
LIABILITIES
NET WORTH
AGE OF RECEIVABLES RATIO
This ratio shows the efficiency of  business's collection capatibilities. For example if  firm's payment terms are 30 days, and ratio is 55, that long period may show a business's credit policies and collection procedures need attention. However, ratio must be compared with previous years and to industry averages in similar sectors.
Accounts Receivable x365
SALES / REVENUE 
AGE OF INVENTORY RATIO
This ratio is a measurement of the spees with which merchandise moves through the business. For example if your inventory remains in stock for 59 days, that means your inventory turns over six times per year ( 365 divided by 59 = 6.19 ). These ratios are of value only when compared to similar industry, as well, it is important to compare with previous years, because sharp increases may indicate unsaleable goods or buildup of obsolete.
        Inventory         x365
Cost of Goods Sold 
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