How can you determine if your company is financially healthy?

1 Profitability Ratios

Profitability ratios measure how well a company generates income from its operations and investments, as well as how efficiently resources are used and how much is retained after expenses. Gross profit margin indicates production cost control and pricing strategy, with a higher margin meaning more profit per sale. Net profit margin reveals the overall costs and income management, with a higher margin representing more profit per dollar of revenue. Return on assets (ROA) demonstrates how well assets are utilized to produce income, with a higher ROA indicating more income per unit of asset. Finally, return on equity (ROE) shows how equity is leveraged to produce income, with a higher ROE meaning more income per unit of equity. To calculate these ratios, data from the income statement and balance sheet is required. Comparing the ratios with industry benchmarks, historical trends, and goals can help to evaluate profitability performance.

2 Liquidity Ratios

Liquidity ratios measure how well your company can meet its short-term obligations with its current assets. These ratios show how easily you can convert your assets into cash and how much cushion you have to cover your liabilities. The most widely used liquidity ratios are the current ratio, the quick ratio, and the cash ratio. The current ratio is the ratio of your current assets to your current liabilities, indicating how many times you can pay off your short-term debts with your available resources. The quick ratio is the ratio of your current assets minus your inventory to your current liabilities, indicating how many times you can pay off your short-term debts with your most liquid assets. The cash ratio is the ratio of your cash and cash equivalents to your current liabilities, indicating how many times you can pay off your short-term debts with your cash on hand. To calculate these ratios, you must obtain data from both the balance sheet and the cash flow statement. Comparing these ratios to industry benchmarks, historical trends, and goals will help you evaluate your liquidity performance.

3 Leverage Ratios

Leverage ratios measure how much your company relies on debt to finance its operations and growth, showing the balance between debt and equity, as well as the risk from interest payments and creditors. Examples of leverage ratios include the debt-to-equity ratio, which shows how much debt you use relative to your equity to fund your assets, and the debt-to-asset ratio, which indicates how much debt you use relative to your assets. Additionally, the interest coverage ratio indicates how easily you can pay your interest obligations from your operating income. To calculate these ratios, you must obtain data from your balance sheet and income statement. You can then compare these ratios with industry benchmarks, historical trends, and goals to evaluate your leverage performance.

4 Efficiency Ratios

Efficiency ratios measure how well your company manages its assets and liabilities to generate revenue and cash flow. These ratios show how quickly you turn your inventory, receivables, and payables into cash and how effectively you use your fixed assets. The most widely used efficiency ratios are the inventory turnover ratio which indicates how many times you sell and replace your inventory in a given period, the receivables turnover ratio which indicates how many times you collect your receivables in a given period, the payables turnover ratio which indicates how many times you pay your suppliers in a given period, and the asset turnover ratio which indicates how well you use your assets to generate revenue. To calculate these ratios, you need to obtain the relevant data from your income statement, balance sheet, and cash flow statement. You can compare these ratios with industry benchmarks, historical trends, and goals to evaluate your efficiency performance.

5 Growth Indicators

Growth indicators measure how much a company expands its revenue, income, assets, and equity over time. They provide insight into the speed of market share growth, customer base growth, and competitive advantage growth. Commonly used growth indicators include the revenue growth rate (percentage change in revenue from one period to another), net income growth rate (percentage change in net income from one period to another), asset growth rate (percentage change in total assets from one period to another), and equity growth rate (percentage change in total equity from one period to another). To calculate these indicators, data must be extracted from the income statement and balance sheet. Comparing your indicators with industry benchmarks, historical trends, and goals will help you assess your growth performance.