Leverage ratios
1. Debt-to-equity ratio = Total liabilities / Shareholders' equityMeasures how much debt a business is carrying as compared to the amount invested by its owners. This indicator is closely watched by bankers as a measure of a business’s capacity to repay its debts.
Shows the percentage of a company’s assets financed by creditors. A high ratio indicates a substantial dependence on debt and could be a sign of financial weakness.
Liquidity ratios
1. Working capital ratio = Current assets / Current liabilitiesIndicates whether a business has sufficient cash flow to meet short-term obligations, take advantage of opportunities and attract favourable credit terms. A ratio of 1 or greater is considered acceptable for most businesses.
2. Cash ratio = Liquid assets / Current liabilitiesIndicates a company's ability to pay immediate creditor demands, using its most liquid assets. It gives a snapshot of a business's ability to repay current obligations as it excludes inventory and prepaid items for which cash cannot be obtained immediately.
Profitability ratios
1. Net profit margin = After tax net profit / Net salesShows the net income generated by each dollar of sales. It measures the percentage of sales revenue retained by the company after operating expenses, interest and taxes have been paid.
2. Return on shareholders’ equity = Net income / Shareholders' equityIndicates the amount of after-tax profit generated for each dollar of equity. A measure of the rate of return the shareholders received on their investment.
3. Coverage ratio = Profit before interest and taxes / Annual interest and bank chargesMeasures a business's capacity to generate adequate income to repay interest on its debt.
4. Return on total assets = Income from operations / Average total assetsMeasures the efficiency of assets in generating profit.
Operations ratios
1. Accounts receivable turnover = Net sales / Average accounts receivableA higher turnover rate generally indicates less money is tied up in accounts receivable because customers are paying quickly.
2. Average collection period = Days in the period X Average accounts receivable / Total amount of net credit sales in periodIndicates the amount of time customers are taking to pay their bills.
3. Average days payable = Days in the period X Average accounts payable / Total amount of purchases on creditMeasures the average number of days it you are taking to pay suppliers.
4. Inventory turnover = Cost of goods sold / Average inventoryMeasures the efficiency of assets in generating profit.
Try BDC’s free financial ratio calculators to assess the performance of your business.
