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 


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 

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) 


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.
DebttoNet Worth Ratio 

The small firm's debttonet 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
debttonet worth ratio is calculated as follows: 


Total
Debt (or liabilities) 


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 

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 


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 

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 salestototal 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 

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 salestoworking 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 

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 


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
profittoequity 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 


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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