Ratio Analysis Overview (03:03)

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Financial ratios are used to evaluate trends, determine business health, and serve as performance indicators. The current, quick, inventory turnover, debt to equity, return on equity, and net profit margin ratios are calculated monthly, quarterly, and at year end.

Current Ratio (02:54)

Current ratios determine whether a business can pay its debts. It's calculated by dividing current assets by current liabilities; view a sample calculation for a restaurant. Creditors look for a ratio of 2.0 or above.

Quick Ratio (01:32)

Quick ratios determine whether assets can be quickly converted to cash to pay debts. View a sample calculation for a restaurant. A ratio of 1.0 or higher is acceptable.

Inventory Turnover Ratio (02:21)

Inventory turnover ratios indicate how many times a business can sell and replace its inventory over a time period. View a sample calculation for a restaurant; compare to industry standards to determine business health.

Debt to Equity Ratio (02:23)

The debt to equity ratio shows the proportion of equity and debt used to fund assets and is calculated by dividing total liabilities by owner's equity. View a sample calculation for a restaurant and hear acceptable ranges for different industries.

Return on Equity Ratio (01:50)

The return on equity ratio indicates business profitability, and is calculated by dividing net income by owner's equity. View a sample calculation for a restaurant and hear acceptable percentages.

Net Profit Margin Ratio (01:53)

The net profit margin ratio shows how efficient a business is at cost control and is calculated by dividing net income by net sales revenue. View a sample calculation for a restaurant. Compare with industry standards to determine true profitability.

Ratio Analysis Summary (01:37)

Ratio analysis helps determine business health and performance, and can be used to show changes over time. Creditors and investors use ratio analysis to decide whether a business is capable of taking on more debt.

Credits: Ratio Analysis: Business Finance Essentials (01:03)

Credits: Ratio Analysis: Business Finance Essentials