Reid Business Solutions uses financial ratios to analyze your company’s health. These ratios are used in different ways and for other financial business purposes.
Liquidity ratios are used to determine how easily a company will meet its short-term financial obligations. Generally speaking, with liquidity ratios, higher is better.
A company’s current ratio provides an assessment of the company’s ability to pay off its current liabilities (liabilities due within a year or less) using its current assets (cash and assets likely to be converted to cash within a year or less).
Return on Assets
A company’s return on assets shows us the company’s profitability in the company’s size (as measured by total assets). In other words, return on assets seeks to answer the question,” How efficiently is this company using its assets to generate profits
Return on Equity
A company’s equity return is similar, except the shareholder’s equity is used instead of total assets. Return on equity asks, “How efficiently is the company using its investors’ money to generate profits.”
Gross Profit Margin
A company’s gross profit margin shows what percentage of sales remains after covering the sold inventory or product cost. This gross profit is then used to cover overhead costs, with the remainder being the company’s net income.
Financial Leverage Ratios
Financial leverage ratios show how a company has used debt (as opposed to capital from investors) to finance its operations.
A company’s debt ratio shows what portion of the company’s assets has been financed with debt.
Debt to Equity Ratio
Debt to Equity Ratio shows eh ratio of the financial via debt to financing via capital from investors.
Accounts Receivables Turnover
A company’s receivables turnover (calculated as credit sales over a period divided by Average Accounts Receivable over the period ) shows how quickly the company is collecting up its Accounts Receivable.