Financial ratios give you a way to evaluate your company’s performance and compare it with similar businesses in the same industry. They provide objective measurements that allow business owners to see how different components of their financial information match up. It gives them insight into what they need for true success and understanding where there may be room for new opportunities.
Key Financial Ratios to Boost Your Business
Utilization (Asset Management) Ratios measure how well a company uses its assets to generate sales. You can measure it in terms of both efficiency and intensity.
- Cash Conversion Cycle- is your DIO plus your DSO minus your DPO.
- Inventory Turnover- is your inventories average and the cost of the goods you sold.
- Days Payables Outstanding (DPO)- is the number of purchases you made on credit.
- Days Inventory Outstanding (DIO)- is the number of days your inventory is stocked and ready for sale.
- Accounts Payable Turnover- is the cost of the goods you sold.
- Accounts Receivable Turnover- is the number of net credit sales you made.
- Days Sales Outstanding (DSO)- shows how long customers take to pay their bills.
Profitability Ratios show how your company uses assets and manages its operations.
- Return On Assets (ROA)- shows how you use your business assets to gain profits.
- Profit Margin- is the measurement of your net sales and income.
- Coverage Ratio- measures your ability to make your obligated interest payments.
- Return On Equity (ROE)- measures how much profit you make after taxes.
Leverage Ratios give information on your ability to meet your company’s obligations.
- Debt-to-Equity Ratio- shows how much debt your company has compared to what you have invested.
- Debt Ratio- show how much of your assets are funded by creditors.
Liquidity Ratios show how well you can pay your bills.
- Quick Ratio- measures how well you pay the debt for short-term obligations.
- Working Capital Ratio- measures if your company can pay the short-term debt.
Financial statement accounts are a crucial part of any company’s performance. They enable stakeholders to understand how well the business is doing and which parts might need improvement. Financial ratios are one standard tool used for analysis.
Financial statements show what has happened in terms of revenue or expenses over time as compared against income before taxes (or cost). It indicates profitability based on accounting standards set out by government regulations.
Ratios are a great way to compare the financials of different companies. Managers can also use ratios at all levels for their own business decisions based on how it stacks up against competitors’ numbers. As a result, it will help them make more informed moves with less risk involved.
If you’re wondering what are financial ratios used for, Lantern by SoFi has the answers. According to Lantern by SoFi, “You may also be able to identify trends when you compare your business’s ratios from one time period to another.”