A Good Ol' Heaping of Financial Ratios

Key Small Business Ratios

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Below are some of the key ratios that can be used to analyze your business. We have analysis software that can provide the average ratios for your industry and we can compare how your business is doing. Contact us if you wish to conduct this analysis.

Current Ratio
= Total Current Assets / Total Current Liabilities
Explanation: Generally, this metric measures the overall liquidity position of a company. It is certainly not a perfect barometer, but it is a good one. Watch for big decreases in this number over time. Make sure the accounts listed in "current assets" are collectible. The higher the ratio, the more liquid the company is.
Quick Ratio
= (Cash + Accounts Receivable) / Total Current Liabilities
Explanation: This is another good indicator of liquidity, although by itself, it is not a perfect one. If there are receivable accounts included in the numerator, they should be collectible. Look at the length of time the company has to pay the amount listed in the denominator (current liabilities). The higher the number, the stronger the company.
Inventory Days
= (Inventory / COGS) * 365
Explanation: This metric shows how much inventory (in days) is on hand. It indicates how quickly a company can respond to market and/or product changes. Not all companies have inventory for this metric. The lower the better.
Accounts Receivable Days
= (Accounts Receivable / Sales) * 365
Explanation: This number reflects the average length of time between credit sales and payment receipts. It is crucial to maintaining positive liquidity. The lower the better.
Accounts Payable Days
= (Accounts Payable / COGS) * 365
Explanation: This ratio shows the average number of days that lapse between the purchase of material and labor, and payment for them. It is a rough measure of how timely a company is in meeting payment obligations. Lower is normally better.
Gross Profit Margin
= Gross Profit / Sales
Explanation: This number indicates the percentage of sales revenue that is paid out in direct costs (costs of sales). It is an important statistic that can be used in business planning because it indicates how many cents of gross profit can be generated by each dollar of future sales. Higher is normally better (the company is more efficient).
Net Profit Margin
= Adjusted Net Profit before Taxes / Sales
Explanation: This is an important metric. In fact, over time, it is one of the more important barometers that we look at. It measures how many cents of profit the company is generating for every dollar it sells. Track it carefully against industry competitors. This is a very important number in preparing forecasts. The higher the better.
Advertising to Sales
= Advertising / Sales
Explanation: This metric shows advertising expense for the company as a percentage of sales.
Rent to Sales
= Rent / Sales
Explanation: This metric shows rent expense for the company as a percentage of sales.
G & A Payroll to Sales
= G & A Payroll Expense / Sales
Explanation: This metric shows G & A payroll expense for the company as a percentage of sales.
Interest Coverage Ratio
= EBITDA / Interest Expense
Explanation: This ratio measures a company's ability to service debt payments from operating cash flow (EBITDA). An increasing ratio is a good indicator of improving credit quality. The higher the better.
Debt-to-Equity Ratio
= Total Liabilities / Total Equity
Explanation: This Balance Sheet leverage ratio indicates the composition of a company's total capitalization -- the balance between money or assets owed versus the money or assets owned. Generally, creditors prefer a lower ratio to decrease financial risk while investors prefer a higher ratio to realize the return benefits of financial leverage.
Debt Leverage Ratio
= Total Liabilities / EBITDA
Explanation: This ratio measures a company's ability to repay debt obligations from annualized operating cash flow (EBITDA).
Return on Equity
= Net Income / Total Equity
Explanation: This measure shows how much profit is being returned on the shareholders' equity each year. It is a vital statistic from the perspective of equity holders in a company. The higher the better.
Return on Assets
= Net Income / Total Assets
Explanation: This calculation measures the company's ability to use its assets to create profits. Basically, ROA indicates how many cents of profit each dollar of asset is producing per year. It is quite important since managers can only be evaluated by looking at how they use the assets available to them. The higher the better.
Fixed Asset Turnover
= Sales / Gross Fixed Assets
Explanation: This asset management ratio shows the multiple of annualized sales that each dollar of gross fixed assets is producing. This indicator measures how well fixed assets are "throwing off" sales and is very important to businesses that require significant investments in such assets. Readers should not emphasize this metric when looking at companies that do not possess or require significant gross fixed assets. The higher the more effective the company's investments in Net Property, Plant, and Equipment are.