Service Corps of  Retired Executives Chapter 570

Fairless Hills, PA: 215-943-8850  +   Perkasie, PA: 215-257-5390 +    Doylestown, PA : 215-943-8850

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DOCUMENTS MENU EVALUATING FINANCIAL STATEMENTS There are a number of simple ratios that are calculated to determine the strength of a business. They are calculated from the Assets & Liabilities (Profit & Loss) Statement.  CURRENT RATIO + measures the ability of the company to pay current bills.  QUICK RATIO +measures the ability to pay immediate obligations promptly without causing any disruption in the business.  DEBT TO NET WORTH RATIO +indicates the relationship between the business debt & the owner's equity. High ratios are not conducive to bank borrowing & often are a cause for loan refusal.  WORKING CAPITAL TURNOVER +measures how efficiently the business is using its available assets  OPERATING RATIO +measures the frequency of inventory turn-over. The higher the turnover, the better utilization is made of the money invested in inventory. Inventory includes the cost of warehousing & maintenance CURRENT RATIO    CURRENT RATIO= CURRENT ASSETS                  -------------------                  CURRENT LIABILITIES                  CASH + RECEIVABLES + INVENTORY             =    -------------------------------------                  ACCOUNTS PAYABLE+SHORT TERM BORROWING Typically between 1.0 and 2.0 QUICK RATIO    QUICK RATIO = CURRENT ASSETS-INVENTORY                 ------------------------                 CURRENT LIABILITIES                 CASH + RECEIVABLES              =  -------------------------------------                 ACCOUNTS PAYABLE+SHORT TERM BORROWING As close to 1.0 as practical, not less than 0.5 DEBT TO EQUITY RATIO  DEBT RATIO = TOTAL LIABILITIES              -----------------              OWNER'S EQUITY Usually not higher than 3 to 5 in a small company TURNOVER  TURNOVER = EFFICIENCY = NET SALES FOR YEAR                         ------------------------------                         AVERAGE CURRENT ASSETS FOR YEAR Varies widely by industry and business;  ask banker for a target OPERATING RATIO  OPERATING RATIO =    COST OF GOODS SOLD                      --------------------------                      AVERAGE VALUE OF INVENTORY Also varies widely by industry; ask banker for a target DOCUMENTS MENU