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What signals does each give a business owner

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Outline the key points of current ratio, quick ratio, debt-ratio, debt to net worth ratio, times interest earned, average inventory turnover ratio, average collection period ratio, average payable period ratio, net sales to total assets ratio, net profit on sales ratio, net profit to assets ratio, net profit to equity ratio. What signals does each give a business owner?

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Solution Summary

What a signal does to each business owner is determined. The net profit on sales ratios are examined.

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Business Ratios:

In the business environment, measures have to be taken to ensure that the operations of the company can be sustained in the present times and the future. The use of business ratios enable organizations to manage and assess their performance to guarantee a secured business future. The business ratios provide the business owners as well as the managers with a precious tool to measure the progress of the company against any set strategic goals, the competitors and the overall business market. The tracking of the business ratios by a company will enable it to identify innovative rends as they develop (Ration Analysis, 2007).

Current Ratio

This is a popular finance ratio that is used in the organization to test the current working capital position of the company. It is obtained by calculating the proportions of all the current assets that are available in the organization to cover the current liabilities. This current ratio is used in the financial reporting of an organization. It measures the company's ability to meet its financial obligations which is the mainstream of the operations of the company. The current ratio which is a liquidity ratio that measures a company's ability to pay the short- term financial obligations enables the business owner to monitor all the finances in the organization so that the required financial obligations are met. When the obligations are met by the business owner, a sense of efficiency of the organization's operating cycle becomes visible (Berry, 2011).

Quick Ratio

This ratio is also known as the 'acid test'. This ratio measures the ability of the company to utilize its near cash or the available quick assets to retire its current liabilities as soon as possible. Examples of quick assets are; cash, marketable securities and all the company receivables. This ratio enables the business owner to be able to make the payments of the current obligations with ease. When the quick ratio is high the business owner will understand that the company can handle the payments on current obligations. When the quick ratio is low, this means that the business relies on the other inventories to meet the payment of current obligations of the ...

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