Business Analysis with QuickBooks®

Chapter 6. Ratio Analysis

IN THIS CHAPTER

• Liquidity Ratios

• Profitability Ratios

• Leverage Ratios

• Activity Ratios

There are certain numbers that appear in your company's income statement and balance sheet that, combined properly, can give you much more insight into how the company is performing than just the raw dollars. The combinations usually take the form of ratios, such as the ratio of current assets to current liabilities.

Some ratios are of greater interest depending on your role. As a potential creditor, for example, you would probably be more interested in a company's debt ratio than in its inventory turns ratio. A manager will likely attend more closely to the operating expense ratio than to the times interest earned ratio. But anyone with a financial interest in a company should want to know how the company is performing as measured by its return on assets.

Some ratios need extra context. For example, it's nice to know the current ratio is 3, but it doesn't mean as much unless you know the amount of working capital that ratio represents.

The ratios group themselves naturally into several categories, such as liquidity ratios and activity ratios. You'll find them covered in sections that comprise related ratios.

In this chapter I explain some of the most useful financial ratios and describe how you can obtain them either directly from QuickBooks' financial reports or with assistance from exports to Microsoft Excel.

Liquidity Ratios

Liquidity ratios give the business analyst a sense ...