assessment of business performance over time and against competitors

10.4 Finance and Accounting Strategy – Accounting Data and Ratios 📈

In this section we’ll learn how to use numbers to tell the story of a business’s health over time and compared to its rivals. Think of ratios like a superhero’s power‑level meter – they show you how strong, fast, and stable a company really is.

Why Ratios Matter 💡

Ratios turn raw financial statements into bite‑size insights. They help you answer questions such as:

• Is the company able to pay its bills? (Liquidity)
• Is it making money from its sales? (Profitability)
• How efficiently is it using its assets? (Efficiency)
• Can it survive a long‑term debt crisis? (Solvency)

Key Ratios and What They Tell Us

Liquidity Ratios 💧

Liquidity ratios measure a company’s ability to cover short‑term obligations.

Formulae (in LaTeX):

• Current Ratio: $CR = \frac{Current\ Assets}{Current\ Liabilities}$
• Quick Ratio: $QR = \frac{Current\ Assets - Inventories}{Current\ Liabilities}$

Profitability Ratios 💰

Profitability ratios show how well a company turns sales into profit.

Key formulas:

• Gross Profit Margin: $GPM = \frac{Gross\ Profit}{Sales}$
• Net Profit Margin: $NPM = \frac{Net\ Income}{Sales}$
• Return on Assets: $ROA = \frac{Net\ Income}{Total\ Assets}$

Efficiency Ratios 🔄

Efficiency ratios measure how well a company uses its resources.

Formulas:

• Asset Turnover: $AT = \frac{Sales}{Total\ Assets}$
• Inventory Turnover: $IT = \frac{Cost\ of\ Goods\ Sold}{Average\ Inventory}$

Solvency Ratios