EVALUATING
FINANCIAL STATEMENTS
There are a number of simple ratios that
are calculated to determine the strength of a business. They
are calculated from the Assets & Liabilities (Profit & Loss)
Statement
CURRENT RATIO
- measures the ability of the company to pay current
bills.
|
| CURRENT RATIO |
= CURRENT
ASSETS |
| |
Current
Liabilities
|
| |
Cash
+ Receivable + Inventory |
| |
= Accounts Payable + Short Term
Borrowing |
| Typically between
1.0 and 2.0 |
|
QUICK RATIO
- measures the ability to pay immediate obligations
promptly without causing any disruption in the business.
|
| QUICK RATIO |
= CURRENT ASSETS
- INVENTORY |
| |
Current
Liabilities
|
| |
Cash
+ Receivable |
| |
= Accounts Payable + Short Term Borrowing |
| As close as 1.0
as practical, not less than 0.5 |
|
DEBT TO NET WORTH
RATIO
- indicates the relationship between the business
debt & the owner's equity. High ratios are not conducive
to bank borrowing & often are a cause for loan refusal.
|
| DEBT RATIO |
= TOTAL LIABILITIES |
| |
Owner's
Equity
|
| Usually not higher than
3 to 5 in a small company |
|
WORKING
CAPITAL TURNOVER
- measures how efficiently the business is using
its available assets
|
| TURNOVER = EFFICIENCY |
= NET SALES
FOR YEAR |
| |
Average
Current Assets for Year
|
| Varies
widely by industry and business; ask banker for a target |
|
OPERATING
RATIO
- measures the frequency of inventory turn-over.
The higher the turnover, the better utilization is made of the
money invested in inventory. Inventory includes the cost of warehousing & maintenance
|
| OPERATING RATIO |
= COST OF GOODS
SOLD |
| |
Average
Value of Inventory
|
| Also
varies widely by industry; ask banker for a target |
|
