Using business ratios can help you analyze the financial health of your business. You can use ratios to help compare your business against other businesses similar to yours, and to see how yours compares to the industry averages. By comparing your business, you can identify trends and make changes accordingly. Here are some of the components of ratio tracking, what they mean, and how they can help your business.
- Accounts Receivable Turnover: This ratio measures the promptness of customer payments. Higher numbers indicate the effectiveness of collection policies and procedures.
- Current Ratio: This ratio gives an indication of a company’s short-term debt paying ability. The higher the ratio, the greater the liquidity.
- Equity to Asset: A measure of financial position, this ratio measures the proportion of total assets financed by the owner’s equity. A higher ratio indicates better protection to company creditors, since more capital has been supplied by the owners and less by the creditors.
- Debt to Equity: Measures the extent the company is financed with money borrowed from non-owners. The higher the value of the ratio, the more total capital has been supplied by the creditors and less by the owners.
- Gross Profit Margin: This percentage measures profitability in terms of return per dollar of gross profit.
Stay tuned for the next post, which covers more ratios terms and what they mean!