Financial Ratios – Five Common Financial Accounting Ratios!
A single variable cannot be attributed for measuring the market value of a certain business. It is an art to calculate the value than a science. Bankrate.com states that a bank daily utilizes more than 150 ratios to check the financial position of a business. So it is always advisable to get the services of a qualified and good accountant to accomplish the task of the ratios analysis in a perfect way. But it is necessary for the business managers to have the detailed working knowledge of this financial ratio so that the business decisions could be taken easily. The five common financial ratios of accounting are illustrated below.
1. Quick ratios:
In accounting, quick ratios mean a ratio that measures the financial liquidity of a business. It helps in learning that how easily a business can transform its assets into cash so that it could cover its liabilities. A company with the low quick ratio shows more risk for the investors. This ratio is calculated by reducing the inventory from the current assets and then the assets are being divided with the total liabilities of the business.
2. Current ratios:
This ratio is quite similar to the quick ratio and it is a trend to use this ratio for checking the liquidity of the business too. The investors prefer to use this ratio with the quick ratio. This ratio is simply calculated by dividing the current assets of a certain business with the current liabilities. This is easy to calculate like a business that possesses $2million as his current assets and $500,000 as his current liabilities then its current ratio will be 4.
3. Return on Asset ratios:
It is a phenomenon that the investors and the managers realize the market value of their business on the basis of profit that it produces. ROA ratio is being utilized to check the profitability of the business. This ratio is obtained by dividing the net income of a particular business for a given period of time with the standard total assets. It helps in understanding the factual profitability of the business at some given period of time.
4. Inventory Turnover ratios:
Companies that deal in the sale of some products, they rely on the regular sale of these products to produce the profit. So in such case the financial position of a business wholly depends on its own inventory turnover. This ratio is also easy to calculate and it is not so problematic. It is figured out by dividing the total sales of that particular business in a year with the value of the average inventory. In this way, the ratio puts the answer in front of you.
5. Day’s Receivable ratios:
The liquidity of a business can be checked in another way. You can check it by having the information that how many days a company requires to have payments from its clients. This is also regarded as the day receivable ratios. It is calculated by dividing the net annual sales by the average gross receivables that is divided by the 365 or (365/Net Annual Sales/Average Gross Receivables)