Financial Ratios of a Small Business

The profitability ratio shows the ability for a company to generate profits. Ratios that are used calculating profitability of a company are return on assets and return on equity. The return on assets calculates the ability of a company to effectively use assets to generate income, the percentages per quarter in year one are; 76%, 22%, 34%, 37%. This shows profit during each quarter. In years two, three, and four the percentages are; 68%, 54%, 49%, 38%. These ratios show a slight decline but still a solid profit. The return on equity shows the amount of money earned per dollar investing into the company by shareholders. By quarter, year one return on equity is .81 .61 .28 .29, years two, three and four are all .32. These numbers show an above average return, the average return in the United States is between .10-.15, and over .20 is considered above average (Kennon, 2011.)

2. List the four basic types of financial ratios used to measure a company’s performance, give an example of each type of ratio and explain its significance.

3. Current Ratio: Take current assets over/divided by current liabilities for this straight forward ratio. Only main drawback is that this ratio excludes inventory, but the reason for that is because a lot of companies have difficulty with converting their inventory into cash. This can also lead to analysis being over or understated. This ratio, like the quick ratio/Acid Test, is an exceptional ratio for determining if a company can handle their short-term obligations.

Current ratio shows how well the company can pay off its short-term liability obligations. Short-term liabilities are debt due within the next year. Companies that have larger amounts of current assets are better able to pay off their current liabilities. The higher the ratio, the better able the company is to pay current obligations. A low ratio indicates the company is weighted down with current debt and the cash flow will suffer. The equation for current ratio

Ratio analysis shows the correlation within certain figures of financial statements, like current assets and current liability, and is used for three types of company needs- within, intra- and inter-company. Association can be shown in proportion, rate, or percentage and can evaluate company’s liquidity, profitability, and solvency. Liquidity ratios show company’s ability to pay obligations and fulfill needs for cash; profitability ratios show wellbeing and success for the certain time period; and solvency ratios show company’s endurance over the years.

Financial ratios are great indicators to find a firm’s performance and financial situation. Most of the ratios are able to be calculated through the use of financial statements provided by the firm itself. They show the relationship between two or more financial variables that can be used to analyze trends and to compare the firm’s financials with other companies to further come up with market values or discount rates, etc.

Financial ratios are critical when it comes to the determination of not only the performance but also the financial health as well as stability of any given firm. In that regard, as a small business owner, I would utilize a number of ratios to find out how my business is really performing. Some of the ratios I would make use of in this case include the current ratio, debt ratio and net profit margin. According to Baker and Powell (2005), of all the liquidity ratios, the current ratio happens to be the most widely utilized. This ratio according to the authors "is computed by dividing the firm's current assets by its current liabilities." As a small business owner, this ratio would help me determine my business' ability and readiness to settle its short term obligations. On the other hand, the debt ratio according to Baker and Powell (2005) "measures the percentage of a firm's total assets financed by debt." It is essentially computed by dividing the sum of all the liabilities of a firm with the sum of its assets. A debt ratio of more than 1 in the case of my business would be an indicator that the value of the entity's assets is lower that the value of its debt. The reverse is true. The net profit margin according to Baker and Powell (2005) "measures the percentage of sales that result in net income." In the author's opinion, the same is computed by dividing the net income figure with the net

Examining financial ratios for a particular period of time can be used to identify unusual changes thus alerting the management on the progress of the business venture. Financial ratios are also helpful in carrying out financial analysis and forecasting. They also allow the owner of the business and the entire management to come up with business specific goals that can easily be traced to determine the company’s progress towards achieving them.

Imagine you are a small business owner. Determine the financial ratios that are important to the business. Compare your ratios with those that are important to a manager of a larger corporation.

Financial Ratios: What They MeanIn assessing the significance of various financial data, managers often engage in ratio analysis, the process of determining and evaluating financial ratios. A financial ratio is a relationship that indicates something about a company's activities, such as the ratio between the company's current assets and current liabilities or between its accounts receivable and its annual sales. The basic source for these ratios is the company's financial statements that contain figures on assets, liabilities, profits, and losses. Ratios are only meaningful when compared with other information.

Financial ratios provide a means to analyze the operations of a company in comparison to its industry and its historical results.

Financial and non- financial ratios forms a key consideration when making investment decisions. Financial ratios reveal the financial viability of investing in the firm. The ratios specify the financial position of the company. The ratios can either explain the liquidity, profitability, or efficiency levels of the firm. They assist in comparing the economic performance of enterprises in the same industry. Therefore, investors rely on the ratios in making feasible investment decisions.

Through indicating the profit margin, return on assets and return on equity to measure sales, assets and other factors, shareholders also can know the global profit performance of the firm and indicate that how the condition of company is.

Financial ratios are a good way to assess the performance of your business and identify potential problems. The ratios are used to measure factors such as profitability, solvency, efficiency, and debt load of your business. Financial ratios are used by company financial situation and also how this company is performing. Commercial ratios are meters of a making mercantile assignment and moreover how this company is performing. Unexcelled productive ratios are deduced confer with from an everlasting mercantile statement. Check determine shrewd the productive ratios the saving gotten base be old to weigh three firm to option, analyze firms trend and also predict bankruptcy. Based on the indicator hint stodgy we foot order financial ratios in 5 possibility categories rove are: liquidity ratios, profit turnover ratios, financial leverage ratios, profitability ratios and dividend policy ratios.

Current ratio indicates the ability of company to meet the short-term debt requirements. The current ratio is used to estimate the firm’s capacity of paying its debts of the next twelve months. The creditors use this ratio in identifying whether or not to give short-term loans. The current ratio also gives a sense of the efficiency of the operating cycleof the company or its ability to turn its finished goods into cash.