When you want to know where you’re at and where you’re headed, reach for this round up of quick-math calculations to take a temperature on your business' financial wellness.
Calculation: Current Assets divided by Current Liabilities
The current ratio is one of the most common financial ratios to measure the liquidity of a company, or its ability to pay short-term obligations. This ratio measures the company’s current assets (which can be quickly turned into cash) versus its current liabilities (which are all the debts that are due within 12 months). Learn more.
Ability to pay
One sign of a healthy business is having sufficient cash to cover its short-term obligations.Read article
Receivable turnover ratio
Calculation: Net Sales Made on Credit divided by Average Receivables
The receivable turnover ratio is the standard calculation for measuring ability to collect. The lower the ratio, the less efficient the collection process. Conversely, the higher the ratio, the more efficient your collection efforts. Learn more.
Ability to collect
How quickly you get paid is an important factor in the health of your business.Read article
Calculation: Direct Costs divided by Revenue
Gross margin essentially tells you how efficient your core business processes are. A higher ratio indicates a greater efficiency. You should compare your gross margin to other companies in the same industry. Learn more.
Calculation: EBITDA divided by Total Revenue
EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA margin will give you a more fulsome efficiency calculation than gross margin because it includes overhead expenses and direct expenses. A higher ratio indicates a greater efficiency. You should compare your gross margin to other companies in the same industry. Learn more.
How well you use your resources can impact your competitive edge.Read article
Year-over-year (YOY) revenue growth
Calculation: (Current Month’s Sales Number minus Last Year's Sales Number from that month) divided by (Last Year's Total Sales) x 100
YOY revenue growth is a key factor in your financial ability to deal with risk. This calculation allows you to compare revenue from various periods – such as annual, quarterly, and monthly performance – and gauge how quickly you’re growing, as well as how seasonality may be affecting you. A healthy or unhealthy growth rate is very business dependent, however the underlying issue is working capital. If the business is growing too fast to sustain its working capital it's going to have less ability to mitigate risk. Learn more.
Debt to tangible net worth ratio
Calculation: (Total Liabilities minus Postponed Shareholder Loans) divided by (Equity minus (Intangible Assets plus Postponed Shareholder Loans))
Debt to tangible net worth ratio is another key factor in your financial ability to deal with risk. A higher debt to tangible net worth ratio shows there is more debt in the company. A lower ratio shows there is more equity. What’s considered a healthy ratio depends on the industry. Learn more.