Financial Ratios for Your Small Business Part II


Macbook and Numbers Side by Side

Last week, we introduced a few financial ratios that you can use on your balance sheet and income statement. This week, we'll add to that list!

Gross Margin

Gross Margin = Gross Profit / Net Sales

When You Use It:

The Gross Margin Ratio gives you a percentage of sales dollars available after you've deducted the cost of merchandise. If yours looks particularly high or low, remember that this varies by industry and by company!

Profit Margin (after Tax)

Profit Margin = Net Income After Tax / Net Sales

When You Use It:

The Profit Margin ratio gives you a percentage of profit per sales dollar after expenses are deducted. If yours looks particularly high or low, remember that this varies by industry and by company!

Times Interest Earned

Times Interest Earned = Earning For Year Before Interest and Income Tax Expense / Interest Expense for the Year

When You Use It:

Use the Times Interest Earned Ratio when analyzing your company's ability to meet interest payments. The computation means you are earning that number times the amount required to pay lenders on interest.

Free Cash Flow

Free Cash Flow = Cash Flow Provided by Operating Activities - Capital Expenditures

When You Use It:

Use the Free Cash Flow Ratio to calculate how much is left over from operating activities after you pay for capital expenditures. It is your choice to deduct other items in Capital Expenditures such as dividends.

Sources:

www.PracticalAccountingVA.com

www.accountingcoach.com

Questions?

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Disclaimer: The views presented in this post are meant as educational resources and should not be taken as direct advice for your personal finances or small business. Should you have questions regarding a post relating to your specific finances, please contact us at info@practicalaccountingva.com.

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