Business Life Insurance 19 - What is Financial Ratio?
Financial statements of the company provide only a part of the financial picture. From these statements a series of financial ratios can be developed which, when reviewed several years in succession and compared with similar companies' ratios, will clarify the company's financial position and point out weaknesses and strengths.
1.The most important ones deal with the company's debt paying ability is expressed as follow
Current Ratio= Current Assets/ Current Liabilities. Current ratio equal or less than 2 is considered to be a minimum safety requirement for a healthy company.
2. Quick Ratio= [current assets-inventory]/Current Liabilities
the Quick Ratio is indicates the company's ability to meet current liability.
3.Cash Ratio=[ cash+ marketable security]/current liability
Assets that could be taken to the bank and converted to cash are considered.
4. Ratio operating cost to revenue
the profitability of a company depends on spending less than it earns, both of these figures are of key importance.
Ratio operating cost to revenue compares the performance of company each year.
Increasing profit ratio year over year indicates the strength of the company.
5. Ratio of cross profit to revenue
It use to measure the ratio the operating costs of revenue
Net revenue=Operating Costs+Gross Profit=100%
6. Net profit ratio
Net profit ratio=income of the year/ net revenue
Net profit ratio give you the income for the year compare to net revenue.
7. Return on investment
Return of investment is the ratio of net profit to equity showing the percentage return of the share holder of the company on their investment. Several years of tracking of return on investment may required to reflect the actual company worth.
I hope this information will help. If you need more information, please visit my home page at:
http://lifeanddisabitityinsuranceunderwriter.blogspot.com/
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I have been studying natural remedies for disease prevention for over 20 years and working as a financial consultant since 1990
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