By admin , 10 de March de 2023

Just like your personal health, the health status of your company can be checked. When you are a business owner it is important to understand finances, as it is indispensable and essential for any business to be successful.

Tracking financial ratios can help you analyze your company’s financial position and thereby help you make much more informed business decisions.

Why are financial ratios important?

Financial ratios are important because they give business owners an effective way to assess financial performance beyond the financial statements and compare it to other similar business models in your industry.

Your balance sheet, income statement, and statement of cash flows are helpful, but they only offer limited information. Financial ratios go beyond numbers, as they reveal how efficient your company is being to finance itself, grow through sales, and manage expenses. But this also gives you some warning sign when things aren’t working properly. Financial ratios help you know where your company is and when a change should be made.

DETERMINING FINANCIAL RATIOS TO KNOW WHERE YOUR COMPANY IS LOCATED

The most important financial ratios are classified as:

• Liquidity: This determines the ability of your company to sell its tangible assets in order to pay its short-term debt, accounts payable and accumulated expenses. When a business is cash-strapped, it can have trouble paying employees, vendors, and other recurring operating expenses, obviously causing serious problems.

Liquidity ratios generally compare a company’s current assets (cash, inventory, and accounts receivable) with current short-term liabilities.

• Leverage ratios: It is the amount of debt that the company has in its capital structure, which includes both debt and shareholders’ equity. A company with more debt than its industry average is considered highly leveraged.

This is not necessarily a bad thing; a growing company could use low interest rates to take advantage of market opportunities. This can be a smart business decision, as long as the company can comfortably afford to service the debt.

• Debt Ratio: This indicator compares a company’s total liabilities to its share capital. It’s an important metric for evidencing the health of a company’s debt-to-equity ratio and provides an early warning signal for when a company borrows too quickly and may have trouble meeting payment obligations. A good debt to equity ratio varies by industry.

Debt to Current Assets: This indicates the percentage of the company’s assets that are financed by creditors.

• Profitability Indices: These indices evaluate the ability to generate income (profits) and create value for shareholders

Profit Margin: This measures the amount of net income earned with each dollar of sales generated by the company. In other words, it shows what percentage of sales remains after all business expenses are paid.

Return on Assets: This indicates how well your business is performing when comparing your earnings to the capital you have invested in assets.

Return on equity: Measures the company’s ability to generate profits from the investments of business shareholders

• Asset management ratios: Asset management ratios analyze the efficiency with which a company uses its assets to generate sales.

Inventory Turnover: Measures the efficiency with which inventory is managed

Accounts Receivable Turnover: Measures how quickly you collect sales made on credit

These ratios are key to quickly assess the profitability and performance of your company.

Have you thought about the impact that shareholders have on the company’s results when their partners withdraw more money than the company’s profits?

If you need financial help, at Due Diligence we profit advise you and take care of your numbers. Find out about our services at www.duediligenceuscorp.com and contact us, we have the right plan for your business.

Let’s partner up!

Source: https://bench.co/blog/accounting/most-important-financial-ratios/#mvav3