The Value of Tracking Key Financial Ratios
( Below are just a few of the essential ratios)
CURRENT RATIO - The Current ratio is viewed frequently by bankers, and is considered a liquidity ratio and measures a firm's ability to meet short term obligation through it's current assets. This ratio is related to the concept of working capital, and indicates the amount of financial cushion, and a company's ability to convert assets to cash without a loss in value. This ratio should be 2.0 or higher. It is also of value to track your net working capital
position which is your current assets minus your current liabilities.
Current Ratio = Current Assets/Current Liabilities
Net Working Capital = Current Assets - Current Liabilities
Liabilities to Net Worth Ratio (debt to equity) - The debt to equity ratio expresses the relationship between capital contributed by creditors versus capital contributed by the owners. A high ratio means a higher risk to would be lenders. A low ratio, means better long-term financial safety. Too much long term debt can burden a company with hefty interest charges. This ratio should not exceed 1.0.
Debt to equity ratio = Total Liabilities/Net Worth
Return on Net Worth -This ratio is utilized to analyze the ability of the firm's management to realize an adequate return on capital invested by the owners of the firm. Generally a relationship of at least 10 percent is regarded as a desirable objective for the risks the owners are taking, and to provide funds for future growth, along with dividends for shareholders.
Return on Net Worth = Net Profit after Taxes/Net Worth (equity)
