1. Current Ratio
Your current ratio measures liquidity, or ability to pay your bills on time. It tells you how much money is available in current assets to pay current liabilities.
Current assets (cash on hand, accounts receivable and inventory) are those assets that can be turned into cash within one year. Current liabilities are all liabilities due to be paid within one year.
The formula for your current ratio is: Current Ratio = Current Assets ÷ Current Liabilities
As a rule, the larger the number, the more able your business is to meet its obligations. A 2:1 ratio, or $2 of current assets for each $1 of current liabilities, is generally considered average.
2. Debt-To-Worth Ratio
This ratio measures the financial strength of your business. It compares the amount of money loaned to your business by creditors to the amount invested by owners.
The formula for this ratio is: Debt-To-Worth = Total Debt (Liabilities) ÷ Net Worth (Equity)
In this case, a smaller number indicates a stronger business. A 1:1 ratio, or $1 of total liabilities for each $1 of equity, is considered average.
3. Inventory Turnover
Your inventory turnover ratio shows you, in theory, how often the dollar value of your inventory is sold and then completely replaced over a one-year period.
The formula for finding inventory turnover is: Inventory Turnover = Cost of Goods Sold ÷ Average Inventory at Cost
A second formula is: Inventory Turnover = Annual Net Sales ÷ Average Inventory at Retail
High turnover indicates merchandise moving swiftly through your store, which generally means fewer losses from markdowns, pilferage and obsolescence.
4. Gross Margin (also known as Gross Profit)
Based on your income statement, your gross margin ratio is a percentage measure of pre-expense profitability. Before figuring the gross margin percentage, you must deduct the Cost of Goods Sold ($) for your merchandise from sales to find your gross margin dollars.
The formula for your gross margin ratio is then: Gross Margin Percentage = Gross Profit (Margin) ÷ Sales
The higher the number, the greater the merchandising efficiency.
5. Profit Before Taxes Margin
Another yardstick of profitability is your profit before taxes ratio. Often called your return on sales, this percentage reflects the amount of money remaining from sales dollars after deducting all expenses except income tax.
The formula for your profit before taxes percentage is: Profit Percentage = Profit Before Taxes ÷ Sales
Theoretically, the higher the percentage, the better off you are. However, many retailers choose to take profits out of the business via salary and benefits to avoid the tax obligation of high profits.