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Financial Ratios & Other Financial Analysis Tools

Here is a list of many ratios used to analyze a company's financial condition - along with an explanation of why they are considered to be important.

Coverage Ratios

Expense to Revenue Ratios

Leverage Ratios

Liquidity Ratios

Operating Ratios & Indicators

Ratio Fusion!

(Altman's Z-Score for Privately Held Firms)

Banks often use ratios in loan contracts with benchmarked limits (aka 'Covenants').
Even if covenants are not listed in your loan contract, banks still look at them.

If you include financial ratios and indicators to your financial statements, it adds credibility. (Banks and Investors) will think you use these indicators internally, and they'll love you for it!
Actually; If you're not using Financial Analysis Tools and Benchmarks internally, you should strongly consider it.




COVERAGE RATIOS:
Coverage Ratios measure the Company’s ability to meet certain obligations and/or the Company’s ability to generate earnings over and above certain expenses or fixed costs.





EXPENSE TO REVENUE RATIOS
Expense to Revenue Ratios are also referred to as Common-Size Analysis. Expenses are expressed as a percentage of total sales. Common-Size Analysis is a very common tool used to compare a company’s activity with prior year activity, with other companies, and with industry averages.





LEVERAGE RATIOS
Leverage ratios attempt to measure either the effectiveness or the extent of a Company’s use of certain assets, liabilities or investments. Leverage ratios vary greatly from one industry to another, so they are more effectively understood when compared to industry standards.





LIQUIDITY RATIOS:
Liquidity ratios indicate the company’s ability to meet its short term obligations.





OPERATING RATIOS and INDICATORS
Operating ratios typically focus attention on some aspect of Earnings or Sales in order to draw a conclusion about the Company’s ability to generate income.





RATIO FUSION!
Lenders and financial analyst will often select a list of ratios and assign a relative point value to each one. This is done to attempt an objective assessment of a particular company.
One of my favorite analytical tools of this type is the Altman's Z-score for Privately Held Firms - A variation of the original Z-score formula developed by Dr. Edward I. Altman in 1968.
#Working Capital is calculated by subtracting Current Liabilities from Current Assets#
Current Assets - Current Liabilities = Working Capital.

*Use our Rule-of-Thumb Valuation App to estimate the value of your company.*