(Continued from the previous post) 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 is Part 2 of the components of ratio tracking, what they mean, and how they can help your business.

• Inventory Turnover: This ratio measures how quickly inventory sold. A higher number generally indicates efficiency. However, companies must be careful of stock-outs in situations where too little inventory is kept on hand.
• Net Profit Margin: Measures the profitability in terms of return per dollar of net profit.
• Quick Ratio: This ratio is often used to evaluate a company’s immediate liquidity position. A quick ratio that is too low indicates greater risk for creditors and investors.
• Return on Assets: This is often used as an overall index of profitability. The higher the value, the more profitable your business.
• Return on Equity: This ratio measures the rate of return on money invested in the company by the owners. The higher the value, the more profitable your business.
• Working Capital: Because it is a dollar amount, this measurement is difficult to compare with other similar businesses, since you must also take into consideration the size of the business. However, it is a measure of the amount of funds available to purchase inputs and inventory items after the sale of current assets and payment of all current liabilities.

Use business ratio analysis to reveal trends and understand where improvement is needed in your business. Use ratios to make comparisons, understand your business, and stay ahead of your competitors.

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!