How To Read Your Key Financial Ratios
How to Calculate Your Key Financial Ratios
Where to Find the Information
What the Ratios Tell
Current Ratio = Current Assets divided by Current Liabilities
Your balance sheet
Tests for solvency or ability to meet current debt obligations. Measures how well you can cover current liabilities with liquid assets. (Higher is better; 2.0 is average.)
Quick Ratio = Cash + Accounts Receivable divided by Current Liabilities
Tests the degree of solvency most strictly, using only the most liquid current assets. (Higher is better; .5 is average.)
Debt-to-Worth Ratio = Total Liabilities divided by Total Owner's Equity
Compares what the company "owes" creditors to what it "owns." Measures the financial strength of the business. (Lower is better; 1.0 is average.)
Inventory Turnover = COGS (Cost of Goods Sold) divided by Average Inventory @ Cost
COGS are recorded on your income statement; inventory is found on your balance sheet.
Measures how often, at present rate of sales, your entire inventory is completely sold and replaced during a given year. Measures inventory "velocity." (Higher is better; average depends on industry.)
Gross Margin % = Gross Profit $ divided by Net Sales
Your income statement (P&L)
Indicates percentage of sales dollars remaining after costs related to purchasing merchandise are recognized.
Profit Before Taxes % = Profit Before Taxes divided by Net Sales
Indicates percentage of sales dollars remaining after all costs (except taxes) are recognized. (Higher is better; average depends on industry.)
Return on Assets (ROA) = Profit Before Taxes divided by Net Assets
Your income statement and balance sheet
Indicates pretax return on assets; measures productivity of assets. (Higher is better; average depends on industry.)
GMROI (Gross Margin Return on Inventory) = Gross Margin $ divided by Average Inventory @ Cost
Gross Margin - your income statement Inventory @ Cost - your balance sheet.
Measures the gross margin returned for each dollar invested in inventory. (Higher is better; average depends on industry.)
Click here. More info on Ratios for Retailers
Use The Institute's Owners Dashboard
Click here. Key Ratios Calculator [Members-Only]
Click here. "Owner's Dashboard" [Video]
Advantages Disadvantages Traditional Banks Stability Array of financial services Many to choose from Competitive pricing Lack of retail industry experience or focus Often slow to respond; impersonal Less interested in smaller transactions Generally available only to profitable companies Private Equity Funds Provide "hands on" value/added expertise Generally well-capitalized May provide access to industry and management expertise Provide "hands on" value/added expertise (Yes, it's the good news/bad news thing!) Strict investment criteria Equity ownership required Required returns often 25% + Require track record of a proven concept Asset-Based Lenders Nontraditional transactions Fewer financial covenants Industry focused Rigid documentation standards Higher transaction costs Onerous reporting Traditionally perceived as lending only to troubled companies
Step 1: Enter LY results for five key ratios Step 2: Enter This Year's Targets Step 3: Each month (no later than the 10th of the month!) enter YTD results
(Need more info on these ratios, how to calculate them, and what they mean? See the Retail Finance Basics section here at The ROI. And, view this online webcast from The ROI Co-Founders for more about the Owner's Dashboard. Click here to download and printout your own master copy of the Owner's Dashboard Trend Form)