Financial Ratios

Liquidity - Current Ratio

Current Assets ÷ Current Liabilities

Optimal Current Ratio

1.5:1 - 2:1

What Does the Current Ratio Show?

Capability to meet short-term financial obligations.

Gearing/Solvency - Debt to Equity Ratio

Total Liabilities ÷ Total Equity

Optimal Debt to Equity Ratio

Optimal = 0.3:1 - 0.1:1 (The lower the better)

Debt to Equity Ratio Shows

Every $1 of business money is matched by (0.10c - 0.33c (hopefully)) of external debt.

Profitability - Gross Profit Ratio

Gross Profit ÷ Sales

Optimal Gross Profit Ratio

Optimal = 0.5:1 - 0.7:1

Gross Profit Ratio Shows

High GPR = Low COGS

Profitability - Net Profit Ratio

Net Profit ÷ Sales

Optimal Net Profit Ratio

Optimal - 0.1:1 - 0.2:1

Net Profit Ratios Show

Shows how much of sales revenue becomes profit.

Profitability - Return on Equity Ratio

Net Profit ÷ Total Equity

Optimal Return on Equity Ratio

Optimal = 0.15:1 - 0.2:1

Return on Equity Ratio Shows

Financial return the owner receives from investing in their business, a high ratio is good (not too high).

Efficiency - Expense Ratio

Total Expenses ÷ Sales

Optimal Expense Ratio

Optimal = 0.5:1 - 0.75:1

Expense Ratios Show

The lower the better, means that business retains more revenue relative to its operational costs.

Efficiency - Accounts Receivable Turnover Ratio

Sales ÷ Accounts Receivable

Answer is divided by 365 to show time required for accounts to be settled.

Optimal Accounts Receivable Turnover Ratio

Optimal = Higher indicates regular debt collection, shorter days indicate quicker credit turn around.

Accounts Receivable Turnover Ratios Show

Shows how well a business can collect their debts, how quickly debtors pay their accounts (receivable).