For many small business owners the financial aspects of the business are things they’ve had to learn on the fly. Liquidity, solvency and other financial terms can be overwhelming and confusing especially when they are being addressed during times of financial hardship or stress. We’ve created this handy infographic to help individuals better understand what these ratios are and how to put them together.
The Small Business’ Guide to Financial Ratios
What are financial ratios?
Financial ratios are tools that determine your small business’ financial health.
Activity Ratios: To determine how efficiently a company utilizes its assets
Inventory Turnover: How frequently inventory was replenished in a year
Receivables Turnover: How often the company collects and converts customers cash as receivables in a year
Payables Turnover: How quickly money is paid off to suppliers
Asset Turnover: How efficiently a company uses its assets to generate revenue
Liquidity Ratios: To measure a business’ ability to meet its short-term obligations
Current Ratio: Measures a company’s current assets against current liabilities
Quick Ratio: Measures the level of the most liquid current assets to cover liabilities
Cash Ratio: Measures the company’s total liquidity
Solvency Ratios: To measure a company’s ability to meet its long-term obligations
Debts-to-Assets Ratio: Measures assets financed by debts
Debt-to-Capital Ratio: Measures total capital financed by debts
Debt-to-Equity Ratio: Measures debt capital to equity capital
Profitability Ratios: To measure the ability of a business to earn an adequate return
Gross Profit Margin: Measures pricing decisions and product costs
Operating Profit Margins: Examines the relationship between sales and management-controlled costs
Net Profit Margin: Compares a company’s net income to its net revenue
Return on Assets (ROA): Measures how efficiently a company utilizes its assets