Financial ratios allow a business owner to analyze and assess the firm's financial performance and position over a period of time. By computing the financial ratios, you can also detect certain relationships between the different types of information. It gives you a quick indication of the firm's performance in the areas of liquidity, profitability, capital structure as well as the financial position and potential risk involved. | |
1)| | Asset Turnover = Sales Revenue / Total Assets (times)| | | This is a measure of how well and effectively assets are being utilized to generate sales revenue. For example, after computation the figure derived is 0.42 times. This means that for every $1 of asset used in the firm, it is able to generate $0.42 of sales.| | | |
2)| | Current Ratio / Working Capital Ratio = Current Assets / Current Liabilities (times)| | | Current ratio measures the ability of the firm to pay its short-term debts obligations (current liabilities) from its current assets when payment is due. Current assets are those items owned by the firm with the intention to generate profits or other assets that can be converted to cash within one year. The higher the ratio, the more liquid the company is. | | | |
3)| | Gross Profit Margin = Gross Profit / Sales Revenue (%)| | | This measures the gross profitability of a business or the operating ratio, which reflects what is left from sales revenue after taking into account the costs of goods sold. For instance, if your gross profit is 20%, it means that for every $1 dollar generated in sales revenue, the firm earns $0.20 to cover other expenses and profit.| | | |
4)| | Net Profit Ratio = Net Profit after Tax / Sales Revenue (%)| | | Net profit ratio on the other hand measures the net profitability of business in relation to revenues. The higher the net profit, it indicates how effective the company is at...