5 Essential Ratios Every Manager Should Know for Financial Analysis

As a manager, financial analysis is an integral part of your duties. Understanding various ratios is one effective way of analyzing financial performance. Here are five essential ratios that every manager should know:

1. Current Ratio
The current ratio is a measure of the company’s liquidity. It’s calculated by dividing current assets by current liabilities. Generally, a current ratio of over 1 shows that the company has enough assets to cover its liabilities.

2. Debt to Equity Ratio
This ratio is used to measure the company’s leverage. It’s calculated by dividing the total debt by the total equity. A high debt to equity ratio shows that the company is heavily in debt and may not be able to pay back its loans.

3. Gross Margin
The gross margin is the difference between sales revenue and the cost of goods sold. It’s expressed as a percentage of sales revenue. A high gross margin shows that the company is making a profit on its products.

4. Return on Equity
This ratio measures the company’s profitability in relation to shareholder equity. To calculate the return on equity, the company’s net income is divided by its shareholder equity. A high return on equity shows that the company is generating a good profit on its investments.

5. Accounts Receivable Turnover
This ratio measures the number of times a company collects its accounts receivable in a year. It’s calculated by dividing sales by accounts receivable. A high accounts receivable turnover shows that the company is able to collect money from its customers quickly.

In conclusion, understanding these ratios will help you assess your company’s financial performance and make informed decisions. Keep in mind that while these ratios are essential, they should not be the only metric in financial analysis. It’s important to consider multiple factors when evaluating your company’s financial health.