You can compare Principal Ratios of your company over a certain period with industry averages as well as with ratios pertaining to other periods to assess current performance.
(Current Assets: Current Liabilities)
This indicates the solvency position of the enterprise. The ideal ratio is 2 under normal business conditions.
(Current Assets – Stock in Hand : Current Liabilities)
This indicates the liquidity position of the enterprise. This ratio is useful in planning future cash requirements.
(Loans (Liabilities) : Capital + Net Profit)
This indicates the level of exposure to external borrowings and is a useful tool in determining the options of raising additional capital internally or externally.
(Gross Profit / total Turnover)
This indicates the percentage of profit earned from direct operations (manufacturing)., This ratio is useful, where an enterprise produces more than one product, in identifying the order of profitability and making decisions such as increasing production capacity, continuance of a product etc.
(Net Profit/ Total Turnover)
This indicates the percentage of net profit earned by the enterprise after considering all expenses of the enterprise. This is useful in identifying the overall profitability of the enterprise.
(As percentage of Sales Accounts)
This is referred to as the percentage of operating cost with respect to the total turnover This ratio is useful in making decisions in the areas of cost control, cost reduction etc.
(Payment performance of Debtors)
This is an analysis of debtor wise payment performance and a useful tool in identifying the most preferred and least preferred customers or agents and planning the receivables collection process.
(Nett Profit/Capital Account + Nett Profit) %
This is a useful tool in measuring returns expected from the project/product and plan additional capital infusion, increase in production capacity (subject to market demand) etc.
(Nett Profit/Working Capital) %
This is referred to as the percentage of net profit to working capital (current assets – current liabilities).
(Sales Account/Working Capital)
This indicates how effectively working capital is used in terms of turnover it can help to generate. It is a useful tool in identifying the level of deployment of funds with respect to sales.
(Turnover / inventory)
This indicates the relationship of inventory with respect to sales. This is a useful tool in identifying the extent of investment in stock and indicates:
● Stock control measures whether to be taken in case of change in demand
● Procurement planning
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