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Why ratios matter
A financial ratio is a simple mathematical comparison
of two or more entries from a company's financial statements.
Business owners and managers use ratios to chart a company's
progress, uncover trends and point to potential problem areas
in a business. Bankers and investors look at a company's ratios
when they are trying to decide if they want to lend you money
or invest in your company.
Ratios provide insight into every financial
element in your company, from its profitability to the effectiveness
of your accounts receivable department. We've put together
calculators for some of the most commonly used business ratios.
When you compare today's ratios to last year's
or a compilation of several years' records, it can help you
chart your progress and plan for the future.
Once compiled, you can also use ratios to compare
your company's performance with others within your industry.
You'll find industry comparisons in publications such as Robert
Morris' Annual
Statement Studies, the Almanac of Business and
Industrial Financial Ratios (published by Prentiss
Hall) or key business ratios, published by Dun & Bradstreet.
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The calculators
• Current
ratio calculator -- measures your company's liquidity
and ability to pay short-term debts by comparing current assets
to current liabilities.
• Quick
ratio calculator -- another liquidity ratio, commonly
called the "acid test." It compares current assets, less inventory,
to current liabilities to determine how readily you can convert
to cash to pay current obligations.
• Debt
to assets ratio calculator -- measures how much a company
relies on borrowing to finance operations, an important ratio
if you're interested in getting a loan.
• Return
on assets calculator -- measures how much income is generated
by assets.
• Gross
profit margin calculator -- measures the amount of each
dollar that can go for overhead and profit.
• Operating
profit percentage calculator -- measures the profitability
of your core business.
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