management 3

process of using the balance sheet and income statement to detect trends in the company and problems 

• profitability ratios
• overall performance ratios
• liquidity ratios
• leverage or sovency ratios
• activity or efficency ratios

measures the ability of the business to earn a profit 

compare to similar companies 

indicates how much proft is earned on your products without considering expenses

how much profit is earned at gross profit level 

neasure of the % of each sale dollar that remains as profit after all expenses have been paid 

how much profit comes form every dollar of sale 

funds available to the company (debts and equity), are they being used wisely?

measures the return the firm earned on its owners investment in the firm 

indicates the firms effectiveness in generating profits from its available assets

measures a companys ability to pay its short term debts as they come due

measurer the number of times the firm can cover its current liabilities with its current assets 

measurer the firms ability to meet its current obligations with the most liquid of its current assets 

can a company pay its long term debts as they are due? 

measures the proportion of a firms total assets that is acquired with borrowed funds

calculates the companys ability to meet interest requirements

want a higher number!

measures the speed with which various accounts are converted into sales or cash

measures the liquidity of the firms inventory 

how quick goods are sold and replenished

measures how many times accounts receivable were collected during the year 

lower number= collect money slow and more money out with customer credit 

company history (interanlly)

compare to competitors

compare to industry average (your size)

internally: managers to see where can improve

• externally: potential stakeholders
• current stake holders
• banks (loans)