Business Ratios

Business ratios are a set of 22 different analytical formulas used to evaluate the overall value of a business. In general, a sophisticated entrepreneur will utilize no less than a dozen of the ratios to gain an overall understanding of the financial performance of a company.

Operating Cash Ratio

Far and above the most valuable liquidity ratio is the operating cash ratio.  Unlike the other liquidity ratios that are balance sheet derived, the operating cash ratio is more closely connected to activity (income statement based) ratios than the balance sheet.   Its primary element, the numerator in this formula is based on the income statement’s …

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Operating Profit Margin

Operating profit margin refers to the value earned as a percentage of net sales.   The operating profit is often referred to as earnings before interest, taxes, depreciation and amortization, (EBITDA).   This is a misleading reference as operating profit is actually defined differently by industry sector.   EBITDA is used primarily in valuing businesses.   But in general, …

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Total Assets Turnover Rate

Within the group of activity ratios, the total assets turnover rate is the broadest in scope.   Similar to other activity ratios, it utilizes net sales as the numerator.  However the denominator doesn’t focus in on a single balance sheet asset group like the working capital turnover or fixed assets turnover rates, it includes all assets.   This …

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Debt Ratio

Debt is a natural part of business.   The most volume (number of transactions) of debt occurs with the simple purchase of materials (inventory) or supplies on account.   Every business buys on account whether it is a traditional vendor account like that found in retail or simply using a credit card.   A third party provides credit …

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Fixed Asset Turnover Rate

The fixed asset turnover rate is another activity ratio whereby an income statement financial characteristic is compared to a balance sheet asset section.    In this case, comparing adjusted sales against historical cost of fixed assets.   This financial business ratio is only effective for business operations that are fixed asset intensive.  So with service based industries …

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Cash Ratio

One of the liquidity ratios used in business is the cash ratio.  It is a much more effective tool for small business than the traditional current or quick ratio.  Although the cash ratio is more difficult to manipulate in small business, most entrepreneurs miscalculate the result.  This resource paper is designed to explain to the business entrepreneur …

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Interest Coverage Ratio

The last of the leverage ratios isn’t really a pure leverage indicator but augments the debt ratio.  Debt requires the payment of interest and so an indicator of the ability to pay this interest is needed.  This is the interest coverage ratio.  It basically identifies how many times earnings can pay the interest required by existing debt.  The …

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