In simple terms, financial ratios are the relationship established between various statistical data provided in the company’s financial documents such as the balance sheet, income statement, cash flow statements, etc. As important as they are as a document, the numbers in these statements alone are not capable of indicating any underlying issues, risk trends, or a probable future performance, unless they are analyzed properly. The performance of a business is ultimately reflected in their periodic financial statements. We have also compiled a comprehensive database of the IRS financial ratios by industry which will act as quick reference for your respective businesses. In this article, we will explore the idea of financial ratios with a deeper insight into some of the basic types of ratios. Analysts, investors, creditors, and all other lending institutions rely on these ratios to gauge a company’s footing in the business. If you cannot find a classification that fits your business exactly, use the closest one and explain in your text how and why your business is different from the standard.Financial ratios are the cornerstone of any company valuation. Variations, such as doing several types of business under one roof, are quite common. Very few organizations fit any one profile exactly. In the real world, financial profile information involves some compromise. This ratio is calculated by dividing Dividends by Net Profit. This ratio is calculated by dividing Total Sales by Net Worth. This ratio is calculated by dividing Current Assets (excluding Inventory and Accounts Receivable) by Current Liabilities. This ratio is calculated by dividing Current Liabilities by Total Assets. This ratio is calculated by dividing Assets by Sales. This ratio is calculated by dividing Profits Before Interest and Taxes by total Interest Expense. This is another measure of cash position. This ratio is calculated by subtracting Current Liabilities from Current Assets. This ratio is calculated by dividing Current Liabilities by Total Liabilities. This ratio is calculated by dividing Total Liabilities by total Net Worth. This ratio is calculated by dividing Sales by Total Assets. This ratio is calculated by multiplying average Accounts Payable by 360, which is then divided by new Accounts Payable. It divides the total new Accounts Payable for the year by the average Accounts Payable balance. This ratio is a measure of how quickly the business pays its bills. This ratio is calculated by dividing the Cost of Sales by the average Inventory balance. Generally, 30 days is exceptionally good, 60 days is bothersome, and 90 days or more is a real problem. This ratio is calculated by multiplying Accounts Receivable by 360, which is then divided by annual Sales on Credit. This is a measure of how well your business collects its debts. This ratio is calculated by dividing Sales on Credit by Accounts Receivable. This ratio is calculated by dividing Net Profit by Net Worth, expressed as a percentage. This ratio is calculated by dividing Sales into the Net Profit, expressed as a percentage. Measures a company’s ability to manage and allocate resources. Indicates profit as a percentage of Total Assets before taxes. This ratio is not applicable if the subject company’s net worth for the period being analyzed has a negative value. Indicates shareholders’ earnings before taxes for each dollar invested. Percentage of Total Assets financed with debt. It shows Total Current Assets excluding Inventory divided by Total Current Liabilities. This ratio is very similar to the Acid Test (see below), and measures a company’s ability to meet its current obligations using its most liquid assets. A number less than one indicates potential cash flow problems. A high ratio indicates that a company can pay its creditors. Expressed as the number of times current assets exceed current liabilities. Measures company’s ability to meet financial obligations. The data involved comes from the database of Integra Information System, a leading provider of industry-specific economic information. This industry information is classified and categorized by Standard Industrial Classification (SIC) codes. It also includes a column of statistical indicators for the specific type of business. It includes dozens of standard business ratios calculated from business plan financials, and used and expected by bankers, financial analysts, and investors. The illustration below shows a Business Ratios table.
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