Measuring your current business ratio is important to track regularly, probably on a quarterly basis. This allows you to have a basis for comparison with previous quarters and years. Changes in your company's current ratio over a period of years can point out problems and successes. A declining current ratio could be pointing to financial problems. An improving ratio could be the result of a brighter financial picture or an overstocked warehouse (inventory is considered an asset). The key here is to find out WHY a ratio has changed.
You can use your gross profit margin ratio to help you set and monitor sales goals for your company. You should measure this ratio very frequently - some businesses measure this daily, others monthly.
Because costs for raw materials, labor and manufacturing expenses all play into your profit margin ratio, a change in this ratio over time could mean it's time to look for new suppliers or review your pricing structure.
As an example, a gross profit margin of 0.33:1 means that for every dollar in sales, you have 33 cents to cover your basic operating costs and profit.
Some business owners will use an anticipated gross profit margin to help them actually set the price of their products. While other factors -- such as competition and demand -- may also play into pricing decisions, a gross profit margin is a good starting point for product pricing. For example, if a product costs $80 to produce, and your gross profit margin is 20 percent, you can calculate your pricing by dividing your cost by (1-.0.2). In this case, $80 divided by .8 would yield a price of $100.
Your operating profit percentage tells you the percentage of your sales that turn into profit. Because the figure excludes miscellaneous income and tax expenses, the operating profit percentage produces an accurate picture of the profitability of your primary business. Reductions in this figure over time might indicate a need to re-evaluate your pricing or your suppliers, or look for ways to cut down on your operating expenses.
The number tells you what portion of your assets are paid for with borrowed money. For example, a 72 percent debt-to-assets ratio means that your creditors have supplied about 72 cents of every dollar of your company's assets. Businesses with a high debt-to-assets ratio may have trouble borrowing any more money or may have to pay a higher interest rate on a loan than it would if its ratio were lower.
A return on assets ratio of 0.05:1 would mean the company is pulling in five cents for each dollar of assets.
Like most business ratios, you can learn the most from this one when you compare it to your ROA ratios from previous years and with the industry norms. You should measure this at least quarterly.