Financial Ratios

• Financial ratios enable external constituencies to evaluate the performance of a firm with respect to other firms in a particular industry.

• Ratio analysis can help a management team identify areas that might be of concern.

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• The management team can track the performance on these ratios across time to determine whether the indicators are improving or declining.

• Financial ratios can be grouped into five categories: liquidity ratios, financial leverage ratios, asset management or efficiency ratios, profitability ratios, and market value ratios.

Financial ratios serve an extremely useful purpose for small business owners who are

attempting to identify trends in their own operations and see how well their business’s stand up

against its competitors. As such, owners should periodically review their financial ratios to get a

better understanding of the current position of their firms.

The sales-to-inventory ratio computes the number of

dollars of sales generated by each dollar of inventory. Firms that are able to generate greater

sales volume for a given level of inventory are perceived as being more efficient.

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