Financial Ratios

Financial Ratios

Lender and investors are able to glean a lot of valuable information from the data available in a company’s’ financial statements and records. Their priority is insuring that they are repaid for any loan or financial investment. Anyone contributing to your company financially wants to know:

Lender and investors are most assuredly interested in a company’s profitability since that is a good measure of ability to repay financial assistance. To measure this aspect they employ a calculation called the Net Profit on Sales Ratio.

Net Profit on Sales =  Net Profit /
Net Sales

 

  • How much of your business you really own
  • Whether there is enough ready cash on hand
  • What is the status of current liabilities?
  • Are profits reaching their potential?

Certain financial ratios provide a wealth of information on the health of your business and answer the questions outlined above. There are many ratios that may be applied to assist in a lending or investing decision the following are some very key ratios a business owner should be aware of:

Lenders are particularly interested in liquidity which reveals the ability to pay bills and the availability of ready cash. They use a calculation called the Current Ratio.

Current Ratio =  Current Assets / Current Liabilities

A 2 to 1 ratio is generally acceptable although acceptability may vary per industry.

Before loaning or investing, a financial entity may review a company’s level of ownership and compare that with claims due to creditors. To check this aspect of your finances, they use a calculation called the Worth to Dept Ratio.

Worth to Debt Ratio = Net Worth /
Total Debt

Published by

Tim Friesner

Marketing Teacher designs and delivers online marketing courses, training and resources for marketing learners, teachers and professionals.