How do you measure how robust your business is? One of the key ways is by looking at business financial ratios, which can be grouped into four categories.

Business Financial Ratio #1  – Liquidity

This is your business’s ability to remain liquid so you can meet your short-term liabilities. How much of a cash cushion do you have each accounting period? How much of your operating cash flow is funneled into your spending projects?

Here are some business financial ratios to help with liquidity measurements:

• Current ratio: measures your ability to meet obligations due in less than one year.
• Defensive interval ratio: compares assets to daily cash expenditures.
• Operating cash flow: evaluates your ability to pay off short-term liabilities using cash flow from operations.

Business Financial Ratio #2 – Operational Risk

Operational risk is how much inherent risk there is in your capital structure and operating model. These business financial ratios will tell you about your creditworthiness and ability to meet periodic liabilities. This is useful in evaluating leverage. Here are some business financial ratios to measure operational risk:

• Asset coverage ratio: measures your ability to cover debt obligations with assets.
• Cash coverage ratio: measures your ability to cover debt obligations with cash.
• Debt service coverage ratio: evaluates your ability to use operating income to repay debt obligations, including interest.

Business Financial Ratio #3 – Profitability

These business financial ratios can show how much profit you can wring from your assets or equity, and how well you have used funds to develop a profitable operational model. Some profitability business financial ratios include:

• Gross margin ratio: the revenue left over after the cost of goods sold is deducted.
• Net profit margin: the percentage of revenue left over after all expenses and taxes.
• Operating margin: the percentage of revenue left over after all expenses.

Business Financial Ratio #4 – Efficiency

The capacity and turnover of your operations. Efficiency measurements identify areas for improvement. These business financial ratios include:

• Accounts payable turnover ratio: expresses credit purchases as a multiple of accounts payable.
• Contribution margin ratio: shows the percentage of earnings retained after variable costs.
• Employee turnover: shows the percentage of employees who have left the company, voluntarily or involuntarily.

Other Essential Numbers

You should also consider these key business financial ratio calculations:

• Return on assets quantifies how much profit the business has generated relative to its available assets.
• Return on equity quantifies how much profit is generated relative to available equity financing.
• Return on investment is a general return figure that investors use to quantify investment performance.
• Earnings per share measures the net income earned on each share of stock.
• Price-earnings ratio reflects investors’ assessments of future earnings.
• Debt-equity ratio is calculated by adding outstanding long- and short-term debt and dividing it by the book value of shareholders’ equity.

With these business financial ratios, financial performance can be ranked against time-series data, competitor ratios, and performance targets. You can draw insights from how computed ratios have evolved over time, and you can benchmark your management against targets you set up for your company.

Business financial ratios help you decipher the overall health of your business. Applying formulas helps you understand your own business and choose the best stocks for your portfolio.

When combined, these business financial ratios are used to get a complete picture of a company’s prospects.

How BlueStone Services Can Help

Work with expert financial professionals like us to help you decide on the right numbers to track and calculate business financial ratios accurately.  We can get you the tailored insights and data you’re looking for in order to make big business decisions.

Contact us today to start finding and measuring the right statistics for your company.