Owning a business requires you to juggle many responsibilities. One of the most important tasks that you must take note of is your financial health because it determines the longevity of your operations. Expert accounting services in the Philippines recommend keeping a watchful eye on your financial ratios by analyzing accounting records.
Tracking your financial ratios will greatly help you analyze the financial position of your company. It assists you in making more informed business decisions as well as forecasts or projections for future growth and development. Learn more about these 10 critical financial ratios below:
Ratio Categories
Reputable tax services in Manila share that the 10 most important financial ratios fall into the following four categories:
- Liquidity – It compares the current assets of the company with the current liabilities. These are the ratios under it:
- Current Ratio
- Quick Ratio
- Days of Working Capital
- Leverage – It is the amount of debt your company has in its capital structure including debt and shareholders’ equity. If your company has more debt than the average for its industry, it will be considered highly leveraged. The leverage ratios are:
- Debt to Equity Ratio
- Debt to Total Assets
- Profitability – It evaluates your ability to generate profit or income. Things to monitor are:
- Profit Management
- Return on Assets
- Return on Equity
- Asset Management – It analyzes and checks whether or not the company is efficient in using its assets to generate sales. These ratios are:
- Inventory turnover
- Receivables Turnover
10 Crucial Ratios
Learn how to compute for these ratios to help you in your operations.
- Current Ratio
It is also called the working capital ratio. It is an estimation of whether your company will be able to pay its debts, obligations, and liabilities within a year. Tax and accounting services in the Philippines calculate using a specific formula.
Formula:
Current Assets ÷ Current Liabilities = Current Ratio
- Quick ratio
The quick ratio or acid-test ratio has similarities with the current ratio. It focuses on the most liquid assets such as cash, accounts receivables, and marketable securities. It does not include prepaid expenses and inventory because it takes time for it to be converted to cash. If your quick ratio is above 1, it’s an indication that you have enough liquid assets to deal with short-term liabilities.
Formula:
Cash & Cash Equivalents + Marketable Securities + Accounts Receivable ÷ Current Liabilities = Quick Ratio
- Days of Working Capital
Days of working capital is the number of days needed to convert working capital to sales. The higher the days of working capital, the longer it takes for your company to convert working capital to sales.
Formula:
(Current Assets – Current Liabilities) (365) ÷ Revenue from Sales = Days Working Capital
- Debt to Equity Ratio
This measures the riskiness of your company’s financial structure. Potential investors and creditors look at this ratio to see whether or not a company will have difficulty in paying its liabilities and debt. You have a good debt-to-equity ratio if your ratio is around 2 or 2.5.
Formula:
Long Term Debt + Short Term Debt + Leases ÷ Shareholders’ Equity = Debt to Equity Ratio
- Debt to Total Assets
It will show you the percentage of your company’s assets financed by creditors. Debt to total assets ratio that is below 1 indicates that you have more assets than liabilities and will not have difficulty paying off your debt and liabilities.
Formula:
Total Debt ÷ Total Assets = Debt to Total Assets
- Profit Management
It will measure the amount of net income you earned with each peso of sales. It will show the percentage of your company’s sales after paying all the business expenses.
Formula:
Net Income ÷ Net Sales = Profit Margin Ratio
- Return on Assets
It shows whether or not your company is performing well. It compares your profits to the capital you invested in. If you have a high return on assets, it means you are efficient in making use of your economic resources.
Formula:
Net Income ÷ Average Total Assets = Return on Assets
- Return on Equity (ROE)
It will measure your company’s ability to generate profit from shareholders’ investments in the business. A good return on equity will depend on the industry that your business belongs to.
Formula:
Net Income ÷ Shareholders’ Equity = Return on Equity
- Inventory Turnover
It will measure how effectively and efficiently your company manages inventory. If your inventory turnover ratio is lower than the industry average, it means that you have poor sales or you have too much in your inventory.
Formula:
Cost of Goods Sold ÷ Average Inventory = Inventory Turnover Ratio
- Receivables Turnover
It will measure how fast you collect the sales that were made on credit.
Formula:
Net Annual Credit Sales ÷ Average Accounts Receivable = Receivables Turnover
Not everyone is adept in math so it’s understandable why these terms may sound Greek to some. If you need help with computations and data analysis, call our team providing expert accounting services in Pasig. We can help you figure out your ratios and assess the fiscal health of your company.
