Saks Gloweli Business Tip – Financial Ratios
Financial Ratios reveal a company’s performance over time (longitudinal analysis) or in a comparison to competitors (cross-sectional analysis)
Leverage ratios measure the financial risk in an organization by comparing debt to equity or debt to assets. A lower proportion of debt indicates less risk, although a stable business with predictable revenues can safely have a higher leverage ration.
Liquidity ratios compare short-term assets to short liabilities. A high ratio indicates a strong ability to meet obligations, but a very high ratio may indicate that assets are inefficiently allocated: e.g. some of the money on hand might be better used for investment.
Operating ratios measure efficiencies in day to day activities, e.g. the ratio of the cost of goods sold to sales, or net profit to gross profit.
Profitability ratios measure the ability to generate profits and include profit margins, return on assets, and return on net worth.
By Sid Mewara, Managing Director, Saks Gloweli Consulting Saks Gloweli Consulting is a management strategy consulting firm based out of Shenzhen and Hong Kong that helps clients grow their business www.saks-gloweli.com