Sample Financial Ratios for ABC Cleaners

Ratios for ABC Cleaners

Year Year 1 Year 2 Year 3 Good or Bad
Current ratio 8.4 16.84 26.46 Good
Return on investment 42.1% 57.1% 39.2% Good
Debt to equity 0.32 0.16 0.08 Good
Debt to assets 0.24 0.14 0.07 Good
Net profit margin on sales 5.2% 8.5% 8.4% Little low
Breakeven Sales
Year 1
Year 2
Year 3
Break even sales ($) $618,319 $698,039 $763,970 Little high
Break even sales (%) 90.16% 86.80% 87.17% Little high

Current ratio: Measures ability to meet short term obligations. Higher the number the better. Anything under 1 is really bad. Current liabilities divided by current liabilities.

Return on investment: Is it worth it to proceed with the business? Is is succeding? Would you be better off investing your money in a term deposit or mutual fund? The rate of return for this company is good. Gain from investment minus cost of investment divided by cost of investment.

Debt to equity: A measure of financial leverage. What proportion of equity and debt is the company using to finance it's assets. A good sign is a declining number since it shows more earnings are being used to finance additional assets and growth. Total liabilities divided by equity.

Debt to assets: How much of the companies assets have been financed by debt. A declining balance is good since is shows less debt is used to finance assets. However, there needs to be a healthy balance between equity and debt being used to finance additional assets. Short and long term debt divided by total assets.

Net profit margins: For every dollar earned, how much is the company keeping. Profit margins differ depending on the industry. The above figure is a little low so a close eye has to be kept on reducing cost of sales and/or expense. Net income divided by revenues.

Break even sales: Measures the amount of sales needed to cover all associated costs. In this case, break evens are a little high and will have to be closely monitored. May have to re-evaluate pricing or reduce associated costs.

Fixed costs per unit divided by unit selling point minus variable costs.

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