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Ratio Analysis
10 Key Ratios
 
Ratio analysis, a method of expressing the relationships between any two accounting elements, provides a convenient technique for performing financial analysis. It is an indication of the Health of Your Business.
 
1. Current Ratio
 
The current ratio measures the firm's solvency by indicating its ability to pay current debts from current assets. It is calculated in the following manner:
 
    Current assets   ChartObject Chart 2
Current Ratio = ---------------
    Current liabilities
     
    $404,474
Current Ratio = ---------------
    $230,735
     
        1994 1995 1996 1997
Current Ratio =

Your Ratios...

1.73 1.89 1.67 1.75
               
With its current ratio of  1.75 your business could liquidate its current assets at 57.05% of book value and still manage to pay your current creditors in full.
               
2. Quick Ratio
 
The quick ratio (or the "acid test" ratio) is a more conservative measure of your firm's liquidity since it shows the extent to which its most liquid assets cover its current liabilities. It is calculated as follows:
 
  Current assets minus inventory ChartObject Chart 3
Ratio = ---------------------------------------
  Current Liabilities
       
  $404,474 minus $16,116
Ratio = ---------------------------------------
 

$230,735

        1994 1995 1996 1997
Quick Ratio =

Your Ratios...

1.60 1.69 1.59 1.68
               
3. Debt Ratio
 
Your firm's debt ratio measures the percentage of total funds in the business provided by its creditors.The debt ratio is calculated as follows:
 
  Total Debt (or liabilities)   ChartObject Chart 4
Ratio = -------------------------------  
  Total Assets  
     
  $240,735  
Ratio = -------------------------------  
  $673,520  
        1994 1995 1996 1997
Debt Ratio =

Your Ratios...

0.3242 0.3017 0.3670 0.3574
               
4. Debt-to-Net Worth Ratio
 
The small firm's debt-to-net worth ratio also expresses the relationship between the capital contributions from creditors and those from owners. This ratio compares what the business owes to what it owns. It is a measure of your firm's ability to meet both its creditor and owner obligations in case of liquidation. The debt-to-net worth ratio is calculated as follows:
 
  Total Debt (or liabilities)   ChartObject Chart 5
Ratio = -------------------------------  
  Tangible Net Worth  
     
  $240,735  
Ratio = -------------------------------  
  $382,266  
       
        1994 1995 1996 1997
Debt Ratio =

Your Ratios...

0.63 0.70 0.67 0.72
           
5. Average Inventory Turnover Ratio
 
Your firm's average inventory turnover ratio measures the number of times your average inventory is sold out, or turned over, during the year. This ratio tells you whether your firm's inventory is being managed properly. It apprises you of whether the business inventory is understocked, overstocked, or obsolete. The average inventory turnover ratio is calculated as follows:
 
    Cost of Goods Sold ChartObject Chart 6
Ratio = -------------------------------
    Average Inventory
     
    $782,824
Ratio = -------------------------------
    $843,535
        1994 1995 1996 1997
Ratio =

Your Ratios..

0.93 0.91 1.14 1.02
               
6. Average Collection Period
 
Your firm's average collection period ratio tells the average number of days it takes to collect accounts receivable. To compute the average collection period ratio, we must first calculate your firm's receivables turnover.
 
    Net Sales   ChartObject Chart 7
Turnover = -------------------------------  
    Accounts Receivable  
       
    $2,180,971  
Turnover = -------------------------------  
    $303,570  
      1994 1995 1996 1997
Turnover =

Number of Times Per Year.............

8.70 8.09 10.32 7.18
 
To calculate the firm's average collection period ratio:
 
    Days in Accounting Period ChartObject Chart 8
Ratio = -------------------------------
    Receivables Turnover
     
   

365 Days

Ratio = -------------------------------
   

7.18 times/year

        1994 1995 1996 1997
Ratio =

Your Ratios..

41.97 45.10 35.37 50.80
               
So, your company's accounts and notes receivable are outstanding for an average of 50.80 days. Typically the higher your firm's collection period ratio, the greater the chance of bad debt losses.
               
7. Net Sales to Total Assets.
 
A company's net sales-to-total assets ratio (also called the total assets turnover ratio) is a general measure of its ability to generate sales in relation to its assets. It describes how productively the firm employs its assets to produce sales revenue. The total assets turnover ratio is calculated as follows:
 
    Net Sales ChartObject Chart 9
Ratio = -------------------------------
    Net Total Assets
     
    $2,180,971
Ratio = -------------------------------
    $673,520
        1994 1995 1996 1997
Ratio =

Your Ratios...

3.54 3.61 3.62 3.24
               
8. Net Sales to Working Capital Ratio
 
The net sales-to-working capital ratio measures how many dollars in sales your business makes for every dollar of working capital (working capital = current assets - current liabilities). Also called the turnover of working capital ratio, this proportion tells you how efficiently working capital is being used to generate sales. It is calculated as follows:
 
  Net Sales ChartObject Chart 10
Ratio = ---------------------------------------------
  Current Assets minus Current Liabilities
   
  $2,180,971
Ratio = ---------------------------------------------
  $173,739
        1994 1995 1996 1997
Ratio =

Your Ratios...

14.98 13.64 14.93 12.55
               
9. Net Profit on Sales Ratio
 
The net profit on sales ratio (also called the profit margin on sales) measures your firm's profit per dollar of sales. The computed percentage shows the number of cents of each sales dollar remaining after deducting all expenses and income taxes. The profit margin on sales is calculated as follows:
 
    Net Profit   ChartObject Chart 11
Ratio = -----------------  
    Net Sales  
       
    $57,400  
Ratio = -----------------  
    $2,180,971   1994 1995 1996 1997
Ratio =

Your Ratios...

$0.0179 $0.0085 $0.0329 $0.0263
               
10. Net Profit to Equity Ratio
 
The profit-to-equity ratio (or the return on net worth ratio) measures your rate of return on investment. Since it reports the percentage of your investment in the business that is being returned through profits annually, it is one of the most important indicators of your firm's profitability and your management's efficiency. The net profit to equity ratio is computed as follows:
 
  Net Profit   ChartObject Chart 12
Ratio = ----------------------------------------  
  Owners' Equity (or Net Worth)  
     
  $57,400  
Ratio = ----------------------------------------  
  $382,266  
        1994 1995 1996 1997
Ratio =

Your Ratios...

0.14 0.07 0.23 0.15

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