10-06-2017, 06:56 AM
Key ratios
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I. Purposes and Considerations of Ratios and Ratio Analysis
Ratios are highly important profit tools in financial analysis that help financial analysts implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios report mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas.
Turnover of Total Operating Assets
Net Sales = Turnover of Total Operating Assets Ratio
Total Operating Assets*
Obviously, an increase in sales will necessitate more operating assets at some point (sales may rise without additional investment within a given range, however); conversely, an inadequate sales volume may call for reduced investment.
Turnover of Total Operating Assets or sales to investment in total
operating assets tracks over-investment in operating assets.
*Total operating assets = total assets - (long-term investments + intangible assets)
Note: This ratio does not measure profitability. Remember, over-investment may result in a lack of adequate profits.
Net Sales to Tangible Net Worth
Net Sales = Net Sales to Tangible Net Worth Ratio
Tangible Net Worth*
This ratio indicates whether your investment in the business is adequately proportionate to your sales volume. It may also uncover potential credit or management problems, usually called "overtrading" and "under trading."