Business ratios can be explained as financial tools that can help you in finding the weak and erroneous areas of your business. With the help of these ratios you can find out the numerical and financial relationship among different entities of your business. Some of the key and important financial ratios are defined as under:-
Liquidity Ratio
This ratio is the measure of an ability of a business to mean its short term financial and production goals. With the help of this ratio one can find out whether a business is able to fulfill its short term obligations.
Current Ratio
It is one of the most important ratios where total assets of the company are divided by total current liabilities of a company. A high value of current ratio indicates that a business has an ability to meet its short term goals and obligations and vice versa.
Leverage Ratio
This ratio is the measurement of the degree at which a certain business is financed by the debt in addition to owner’s equity. The higher value of this ratio indicates that a business is financed by debt more as compared to the owner’s equity.
Activity Ratio
This ratio helps in analyzing whether the organization or a business is using their resources effectively and efficiently.
Inventory Turnover Ratio
This ratio is used to calculate that how an inventory is purchased, maintained, sold and replaced by a business. This can be calculated by dividing sales of a business with the number of items left in the inventory.