Ratio analysis is the process of examining and comparing financial information by calculating meaningful financial statement figure percentages instead of comparing line items from each financial statement.
Importance of Ratio in Business
Ratios measure companies' operational efficiency, liquidity, stability and profitability, giving investors more relevant information than raw financial data. Investors and analysts can gain profitable advantages in the stock market by using the widely popular, and arguably indispensable, technique of ratio analysis.
To check the ration analysis report In Bookkeeper, Go to Reports section and there select Ratio Analysis report from there.
Types of Ratio Available in the report
Current Ratio: Current ratio is a comparison of current assets to current liabilities, calculated by dividing your current assets by your current liabilities. Potential creditors use the current ratio to measure a company's liquidity or ability to pay off short-term debts.
Current Ratio = Current Assets/Current Liabilities
Quick Ratio: The quick ratio is an indicator of a company's short-term liquidity position and measures a company's ability to meet its short-term obligations with its most liquid assets
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
Debt Equity Ratio: The debt to equity ratio is a measure that is used to determine how much debt the company uses relative to its equity to fund its operations. It is a liquidity ratio that indicates the percentage of the company’s financing derived from investors as well as creditors. It is an important measure in finance used in assessing the financial leverage of a company.
Debt Equity Ratio = Debt / Equity
Gross Profit Ratio: Gross profit ratio (GP ratio) is a financial ratio that measures the performance and efficiency of a business by dividing its gross profit figure by the total net sales
Gross Profit Ratio = Gross Profit / Net Sales * 100
Net Profit Ratio: The net profit percentage is the ratio of after-tax profits to net sales. It reveals the remaining profit after all costs of production, administration, and financing have been deducted from sales, and income taxes recognize. It is also used to compare the results of a business with its competitors.
Net Profit Ratio = Net Profit After Tax / Net Sales * 100
Return on Working Capital Ratio: The return on working capital ratio compares the earnings for a measurement period to the related amount of working capital This measure gives the user some idea of whether the amount of working capital currently being used is too high, since a minor return implies too large an investment.
Working Capital Turnover Ratio = Net Sales / Working Capital
Customer Collection Period: In accounting the term Debtor Collection Period indicates the average time taken to collect trade debts. In other words, a reducing period of time is an indicator of increasing efficiency. It enables the enterprise to compare the real collection period with the granted/theoretical credit period.
Average Collection Period = Account Receivable Balance / Total Net Sales * 365
Supplier Payment Period: Creditor days estimates the average time it takes a business to settle its debts with trade suppliers. The ratio is a useful indicator when it comes to assessing the liquidity position of a business.
ACPP = Trade Payable / Credit Purchases * 365
Inventory Days: Inventory days, also known as inventory outstanding, refers to the number of days it takes for inventory to turn into sales. The average inventory days outstanding varies from industry to industry, but generally a lower Inventory Days is preferred as it indicates optimal inventory management.
Inventory Days = Inventories / Cost of goods sold in accounting period * days in accounting period