Financial Intelligence, Revised Edition

Part Five

Toolbox

WHICH RATIOS ARE MOST IMPORTANT TO YOUR BUSINESS?

Certain ratios are generally seen as critical in certain industries. Retailers, for instance, watch inventory turnover closely. The faster they can turn their stock, the more efficient use they are making of their other assets, such as the store itself. But individual companies typically like to create their own key ratios, depending on their circumstances and competitive situation. For example, Joe’s company, Setpoint, is a small, project-based business that must keep a careful eye on both operating expenses and cash. So which ratios do Setpoint’s managers watch most closely? One is homegrown: gross profit divided by operating expenses. Keeping an eye on that ratio ensures that ...