3 Financial Ratios every Manager should never forget
You may probably be wondering why Financial Ratio Analysis: Financial Ratio Analysis may save two major purposes for your managerial decisions;
1) They can assist you to compare the Financial Health of your company to other companies in the same industry or of the same size.
2) They can assist you to analyse the Financial Health of your business over a period of time. This will show you whether your business is improving or declining.
There are various categories of financial ratios that are used to analyse different situations. But as a Business Manager never forget to look for these three Financial Ratios;
1) Liquidity Ratio:- These reflect how easily a company can pay its debts to its creditors. An example of a liquidity Ratio is the Current Ratio which tells you whether the current assets are enough to settle current liabilities. Current ratio below 1 shows critical liquidity problems because it means that total current liabilities exceed total current assets. General rule is that the higher the current ratio the better it is for your company. But there is a limit to this in that abnormally high value of current ratio may indicate existence of idle or underutilized resources in the company.
2) Profitability Ratio: - these reflect how good a company is at making money. An example of a Profitability Ratio is Profit Margin Ratio which tells you how much profit percentage a company is making from its sales. A higher percentage is typically better because it means you are making more profit on the products or services you are selling.
3) Leverage Ratio: these reflect how much debt the company is using to finance its activities. An example of a leverage ratio is the Debt Ratio which tells you what percentage of the company's assets is financed by debt. A lower Debt Ratio is normally considered safer for the company.
So next time you receive your Annual Financial Statements also request for the Financial Ratio Analysis to help you make a Health Financial decision.