The following business ratios are commonly referred to as profitability ratios. You can use them to monitor how well you business is performing.
Whether you choose to do your own financial statements or to have someone else do them for you, understanding these important ratios will help you manage your business more successfully.
1. Gross Profit Margin
= Gross Profit / Sales
This ratio indicates if you need to make changes in your pricing and/or your cost of goods and services sold.
2. Net Profit Margin
= Net Profit/ Sales
This ratio tells you what your net profit is as a percentage of sales revenue.
3. Return on Assets
= Net Profit / Total Assets
This ratio lets you know how well your business is using its assets to produce profit.
4. Return on Equity
= Net Profit / Owner’s Equity
This ratio indicates what you’ve earned on your investment in the business during the accounting period.
Ask us to run a Business Performance Review for you. You’ll see for yourself how various metrics combine to tell you how your business is performing and most importantly what aspects of it you need to work on.