The following important State of Income Ratios measure profitability:
Gross Margin Ratio
This ratio is the percentage of sales dollars left after subtracting the cost of goods
sold from net sales. It measures the percentage of sales dollars remaining (after
obtaining or manufacturing the goods sold) available to pay the overhead expenses of the
company.
Comparison of your business ratios to those of similar businesses will reveal the
relative strengths or weaknesses in your business. The Gross Margin Ratio is calculated as
follows:
Gross Profit
Gross Margin Ratio = _______________
Net Sales
(Gross Profit = Net Sales - Cost of Goods Sold)
Net Profit Margin Ratio
This ratio is the percentage of sales dollars left after subtracting the Cost of Goods
sold and all expenses, except income taxes. It provides a good opportunity to compare your
company's "return on sales" with the performance of other companies in your
industry. It is calculated before income tax because tax rates and tax liabilities vary
from company to company for a wide variety of reasons, making comparisons after taxes much
more difficult. The Net Profit Margin Ratio is calculated as follows:
Net Profit Before Tax
Net Profit Margin Ratio = _____________________
Net Sales
Management Ratios
Other important ratios, often referred to as Management Ratios, are also derived from
Balance Sheet and Statement of Income information.
Inventory Turnover Ratio
This ratio reveals how well inventory is being managed. It is important because the
more times inventory can be turned in a given operating cycle, the greater the profit. The
Inventory Turnover Ratio is calculated as follows:
Net Sales
Inventory Turnover Ratio = ___________________________
Average Inventory at Cost
Accounts Receivable Turnover Ratio
This ratio indicates how well accounts receivable are being collected. If receivables
are not collected reasonably in accordance with their terms, management should rethink its
collection policy. If receivables are excessively slow in being converted to cash,
liquidity could be severely impaired. The Accounts Receivable Turnover Ratio is calculated
as follows:
Net Credit Sales/Year
__________________ = Daily Credit Sales
365 Days/Year
Accounts Receivable
Accounts Receivable Turnover (in days) = _________________________
Daily Credit Sales
Return on Assets Ratio
This measures how efficiently profits are being generated from the assets employed in
the business when compared with the ratios of firms in a similar business. A low ratio in
comparison with industry averages indicates an inefficient use of business assets. The
Return on Assets Ratio is calculated as follows:
Net Profit Before Tax
Return on Assets = ________________________
Total Assets
Return on Investment (ROI) Ratio.
The ROI is perhaps the most important ratio of all. It is the percentage of return on
funds invested in the business by its owners. In short, this ratio tells the owner whether
or not all the effort put into the business has been worthwhile. If the ROI is less than
the rate of return on an alternative, risk-free investment such as a bank savings account,
the owner may be wiser to sell the company, put the money in such a savings instrument,
and avoid the daily struggles of small business management. The ROI is calculated as
follows:
Net Profit before Tax
Return on Investment = ____________________
Net Worth
These Liquidity, Leverage, Profitability, and Management Ratios allow the business
owner to identify trends in a business and to compare its progress with the performance of
others through data published by various sources. The owner may thus determine the
business's relative strengths and weaknesses.
Other Topics of Interest
Looking for cheap cars? Here's how we approached the task of
selecting our winner for the best cheap car online resource
Cheap cars under 1000 for sale. Looking for super cheap
airline tickets? We scanned dozens of sources of cheap flights
on the Internet to come up with our choice
Super cheap flights airline tickets. Apply Ratio Analysis to
Financial Statements to analyze the success, failure, and
progress of your business
Financial
ratio analysis formula. So you are looking for a free
business checking account; can you find one? sure!
Best bank for small business checking account free. A
business plan can provide the owner-manager or prospective
owner-manager of a small construction firm with a pathway to
profit Sample
construction business plan company profile. Starting a new
small business is the dream of many people ... starting that
business converts your dream into reality. But there is a gap
between your dream and reality that can only be filled with
careful planning
Basics of retail operation doc, tips on starting small business.
Looking for super cheap airline tickets? We scanned dozens of
sources of cheap flights on the Internet to come up with our
choice
Discounted dirt cheap airline tickets, low cost air tickets.
We've reviewed dozens of auto insurance companies, brokers and
agents to bring you this elite list of brands
All car insurance companies, allcarinsurance. The quality of
employees and their development through training and education
are major factors in determining long-term profitability of a
small business
Training and
development process, methods for employees. Today, many
researchers are concerned with the information sent by
communication that is independent of and different from verbal
information;
What is non verbal communication nonverbal. Shopping for
Auto Insurance - It is now more important than ever that you
shop autoefully for auto insurance
Cheapest sr22 auto insurance listing. Here is an abbreviated
example of a serious sample business plan examples template
proposal
Proposal sample business plan examples free samples.
Increasing profits through reduce costs and cost cutting must be
based on the concept of an organized, planned program
Cost cutting
strategies business, how to reduce expenses. This article
discusses get best bank bad credit mortgages - compare bad
credit morgages rates
Accounts that deals with houses and morgages. We've reviewed
dozens of auto insurance companies, brokers and agents to bring
you this elite list of brands with the best free quotes online
and very cheap rates
The general car insurance reviews quotes. Looking for cheap
computers? Here's how we approached the task of selecting our
winner for the best cheap computer online resource this year
PC for sale very cheap computers
Advertising
signs for marketing. Looking for super cheap airline
tickets? We scanned dozens of sources of cheap flights on the
Internet to come up with our choice
Dirt cheap airline tickets very cheap ticket airs. When
buying an air conditioner, ask: How many days a year am I going
to use it? How expensive are my electric-utility rates?
Cost of central air conditioner prices for air conditiong room.
New Ideas for Business, Getting Business New Idea are essential
to business progress
Top new idea
invention for business with no money. Wie viel zahlen Sie
für Auto-Versicherung hängt von mehreren Faktoren ab
Kfz billige günstige autoversicherung vergleich.
Off-the-rack suits are getting more expensive, making custom and
made-to-order suits increasingly attractive buys
Cheap low cost men discount suits.
