Small Business vs. Large Corporation: A Comparison of Financial Ratios

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1.Small Business vs. Large Corporation: A Comparison of Financial Ratios 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

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